We describe how Grand
Field (0115) spent HK$63m on a 75% stake in a company which owned nothing
other than a right to invest in a piped gas joint venture, which had lost
its business license even before the acquisition was completed. One of the
men behind this deal also features in our next story, on Kwong Hing (1131),
so stay tuned! |
Cooking with Gas
4th March
2004
Grand Field Group Holdings Ltd (Grand Field, 0115) a
group engaged in property development and investment in Guangdong, went public in
1999 by taking over the listing of Chintex Oil and Gas Company
Ltd (Chintex), which was one of Hong Kong's longest suspended stocks.
Chintex was suspended from trading in Sep-89. It had invested in
two oil refinery projects on the same site in Zhanjiang, PRC
which were seized by order of the mainland courts in Mar-91, resulting in
write-offs of HK$241m and leaving Chintex with no business. Chintex was once
chaired by Chim Pui Chung (Mr Chim), a former Hong Kong legislator who went to
jail for an unrelated forgery offence.
Grand Field
took over the shell in a scheme of arrangement and gave Chintex holders 80
shares in Grand Field for every 2,000 shares in Chintex, leaving the former
owners of Chintex with 2.1% of Grand Field. Grand Field then took over the listing, effective
13-Oct-99, over 10 years after Chintex was suspended.
Now we hit the fast-forward button three years to the subject of
this article.
On 4-Jun-02, Grand Field
announced that it had conditionally agreed on 30-May-02 to buy 75% of
Sino Richest Ltd (Sino Richest) from 3 vendors, for HK$63m, to be
satisfied by the issue of 315m shares in Grand Field at $0.2 each, representing
15.4% of the enlarged Grand Field. The shares were issued at a 33% premium to
the market price of $0.15.
The shares were acquired from Ivan Wong Chi Keung (Mr Wong, 15%), and from
two BVI companies - Worldgate Developments Ltd, owned by Mr Lin
Xian Guo (Mr Lin, 30%) and Logistics China Enterprises Ltd, owned by Mr Zeng Qing Chun (Mr Zeng, 30%) respectively. The remaining 25% of
Sino Richest would be held by Mr Zeng's company. Mr Wong is something of a deal
maker and you will be hearing more about him in our next article.
So what did Sino Richest own, that made it worth so much? Well,
not much. It was only incorporated on 3-May-02, less than 4 weeks before the
agreement with Grand Field. On 25-May-02 it signed an agreement with a Chinese-named entity
(no translation was offered in the announcement) to establish a joint venture to develop and construct gas
pipelines in Chongqing, China. Sino Richest would own 80% of the JV, which
was planned to have a registered capital of HK$30m. At 30-May-02 Sino Richest had unaudited net
liabilities of HK$18,380.
The announcement contained absolutely no explanation of who Mr
Wong, Mr Lin and Mr Zeng were, or why it was that Grand Field could not have
entered into the deal on its own. Grand Field was, in effect, paying these men a
$63m premium for the right to invest $18m in 60% of a gas project. That's a 350%
finder's fee!
A condition of the deal was the obtaining of a valuation report
valuing the JV at not less than $95m. The
circular to Grand Field shareholders dated 8-Jul-02 contained a valuation report on the JV, assuming it
had been fully invested, by B.I. Appraisals Ltd, signed by a William C.K. Sham
(an unfortunate name in the circumstances),
which valued the JV on a discounted cash flow basis at HK$106m. However, this
report had so many
assumptions that, in our view, it was worthless to investors. The assumptions
included:
-
assuming that the projections outlined in the Business Plan
provided will materialize; and
-
assuming that the projections outlined in the Business Plan
provided are reasonable, reflecting market conditions and economic fundamentals.
The Business Plan was presumably provided by the vendors.
Including these assumptions in the valuation was like saying "the numbers add
up, provided that the numbers are real". At $106m, this valuation
implied that Grand Field's 60% effective interest in the JV would be worth
$63.6m, just a fraction above the consideration for the deal. What a
coincidence.
But wait a minute. The valuation assumed that the business had
been funded, whereas Sino Richest had in reality not yet contributed the
HK$24m of capital
needed to fund its 80% stake in the JV. The circular fudged this issue, but it
is clear from subsequent disclosures that Grand Field was buying a shell which
had not invested any money in the JV.
On
27-Feb-03, Grand Field
announced that Sino Richest (which was now a 75% subsidiary) had not proceeded with the JV because the China
party had "failed to transfer the ownerships of their assets" as
their share of the capital injection, and consequently the JV's business license from the Chongqing Government
"no longer had effect". Grand Field didn't put a date on this lapsing, but
a later
announcement revealed that the licence actually lapsed on 10-Sep-02 (three months
after the licence was issued). Grand Field had been silent about this problem
for over 5 months, even speaking optimistically about the JV in their interim
results published on 19-Sep-02, when they
wrote:
"the Chongqing JV is in a good position to bring substantial
profit contributions to [Grand Field] in the future."
Why did they think that the JV was "in a good position"
when its license had lapsed 9 days earlier? The strangest thing about the timing of this deal is that
according to
note 29 of the 2002 annual report, the acquisition did not actually complete
until December 2002. So why did Grand Field go ahead, knowing that the business
licence had already lapsed? Were they buying gas, or hot air?
In the 27-Feb-03 announcement, although the JV was now dead, Grand Field was still optimistic in disaster,
and said it was
liaising with local government officials in the hope of pursuing the piped gas
business on its own in Chongqing. This turned out to be a pipe-dream.
On 28-Apr-03 the auditor of Grand Field, Charles Chan, Ip & Fung CPA Ltd (CCIF),
thought they could smell gas, and
issued a qualified
audit report for the year ended 31-Dec-02. They wrote:
"the evidence available to us was limited: during the year [Grand
Field] acquired a subsidiary [Sino Richest] and the acquisition generated goodwill on
consolidation of approximately HK$63,006,000...Although the acquisition was
based on independent valuation report, there were no financial due diligence
procedures or audited financial statements at the date of acquisition. We have
been unable to carry out any audit procedures to ascertain the fair value of the
identifiable assets and liabilities of the subsidiary."
This is hardly surprising, because apparently the only thing
Sino Richest owned was a contractual right to pursue a joint venture which was
now dead and for which the business licence had lapsed before the year end, yet the
directors of Grand Field had included the JV as an intangible asset in the accounts.
Were they cooking with gas?
For this intangible asset, Grand Field had paid Mr Wong and his fellow vendors $63m in
shares. CCIF said about the deal:
"we have not obtained all the information and explanations that
we considered necessary for the purpose of our audit...and we were unable to
determine whether proper books of account had been kept."
On 11-Aug-03, Grand Field
announced that on 31-Jul-03 it had sold its stake in Sino Richest to Mr Zeng for
$32m, and was no longer pursuing gas in Chongqing. The announcement did not
specifically say whether this payment was in cash or some other kind, but said that
"the sum" had been
received by the Company. It booked a loss of $31m on the sale in the Jun-03
interim results.
Auditors replaced
The 2002
directors' report said that CCIF would be proposed for re-appointment as
auditors at the AGM, and the
Notice of AGM said the same thing (item 3, to re-appoint auditors), but
something changed. In an
announcement on 27-Aug-03, Grand Field said that Chu and Chu were
appointed as auditors that day, "in accordance with the resolution in the
Annual General Meeting held on 26th June, 2003". It is not clear
what they meant by this - either the re-appointment of CCIF was voted down
(which was not announced) or Chu and Chu were proposed instead (in which case,
was notice given to shareholders?), or CCIF declined to be re-appointed at the
AGM. We simply don't know. The Listing Rules still don't specifically require
companies to announce the outcome of shareholder meetings, although in new rules
from 31-Mar-04, they will have to announce the outcome if a poll is demanded.
Missing Disclosures of interests
As a side note, the 30-Jun-03
interim report names as shareholders Worldgate Developments Ltd and
Logistics China Enterprises Ltd, each holding 126m shares, which they received
when they each sold 30% of Sino Richest to Grand Field. But the report did not
include any deemed holding by Mr Lin or Mr Zeng, if indeed they still own the
two companies.
Coming soon...
This was not the first time Mr Wong had sold a tropical igloo.
In our next story, we'll tell you about the connection between Mr Wong and
Kwong Hing International Holdings (Bermuda)
Ltd (1131), one of several listed companies with which he has done similar
deals.
© Webb-site.com, 2004
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