We urge independent shareholders to vote against Karrie's proposed HK$43m acquisition of a wedding business and travel agency, loss-making startups with net liabilities of $6.6m.

Stop Karrie's expensive wedding
20 March 2012

It's sad when good companies go bad. Karrie International Holdings Ltd (Karrie, 1050), an electronics manufacturing services provider, was once, seven years ago, our "2004 Christmas Pick", gaining 30.8% in the following year for which the recommendation was valid. Unfortunately, that pretty much marked its high point. It wasn't just the global financial crisis hitting demand for its customers' products and the rising cost of Chinese manufacturing, but also a decline in corporate governance that has turned the stock sour.

Karrie announced on 19-Jan-2009 that there would be no more quarterly results - the last set was for the quarter ended 30-Jun-2008. On 22-Oct-2010 it agreed to buy Yixing Karrie Commercial Building Development Co Ltd (Yixing Karrie, PRC) from a company controlled by the Chairman and controlling shareholder, Mr Ho Cheuk Fai (CF Ho) and his wife, for RMB105.12m (HK$123.68m), satisfied with 291m new shares @$0.425.

Yixing Karrie owned a 50-year lease on a piece of bare land in Yixing, Jiangsu province, acquired for RMB52.50m (HK$61.76m), with a site area of 20,012 sq.m. and approval for a 21-floor commercial building of 34,733 sq.m. (373,863 sq ft), with an expected total investment cost (including land) of RMB198.50m (HK$233.52m). Only US$12m (HK$93.6m) had been paid into Yixing Karrie by the vendor at that stage. The 1st and 2nd floors would be for a "shopping plaza or office" and the other floors as "hotel or service[d] apartments". The inclusion of these alternatives tells you just that the project was still at the planning stage. Being part of Jiangsu Yixing Economic Development Zone, Karrie expected to get incentives from the local government of about RMB43.50m (HK$51.18m) "by cash reimbursement" as it had done with its nearby factory site.

Incidentally, Karrie's Yixing factory was mothballed in Nov-2011. The interim report says:

"After two years of production and operation in Yixing Plant, the Group considers that the fundamental facilities in the surrounding area of Yixing Plant are inadequate and suppliers are also scattered. In addition, logistics costs and operating costs are high given its location in the Yangtze River Delta Region, which is relatively far from the plants in the Pearl River Delta Region, and it is difficult to manage."

Perhaps they should have analysed these problems in advance.

The circular for the acquisition of Yixing Karrie said that Chairman CF Ho "has been invested in the development of wedding theme city with all accessory facilities such as hotels, supermarkets, shopping mall, residential properties and various leisure facilities in Fenggang Qu, Dongguan, the PRC since 2001... the Directors...may explore the possibility of developing the commercial building to be built on the Land as a theme city for wedding". The Fenggang facility is probably the Castfast Hotel.

The deal completed on 27-Jan-2011. By the time of the interim results on 29-Nov-2011, the "external structure of the 21-storey building, Yixing Commercial Hotel Building, has been completed and is expected to seal the top early next month". So it appears they went for a hotel. The building was expected to commence operation by the end of 2012.

If investors in Karrie wanted to invest in property developers, there are far more experienced companies to choose from. Investors generally prefer companies to focus on their core competencies, and dislike companies being used as a depository for pet projects of the Chairman. Your editor, who owns less than 5% of Karrie, voted against the transaction, but it was approved by 65.96% to 34.04% at the meeting on 6-Dec-2010. Only 34.6% of the shares which could vote did vote.

The wedding business

Now fast forward to last Friday (16-Mar-2012) and Karrie has announced another proposed connected acquisition, this time to buy Angel Love Studio (HK) Co Ltd (Angel Love) and The One Travel Co., Ltd (One Travel) from The Wedding City Co Ltd, of which CF Ho is a substantial shareholder. These are both recent start-ups. Angel Love was incorporated in HK on 18-Mar-2010 and One Travel, a travel agency, was incorporated in HK on 7-Dec-2009. It's web domain was registered on 3-Mar-2011, and it sends customers to CF Ho's Castfast Hotel in Dongguan, amongst other places.

Angel Love has two even newer subsidiaries, Dreamy Bridal Ltd (Dreamy Bridal), incorporated on 15-Oct-2010 and engaged in wedding photography, and My Affection Ltd, incorporated on 27-Jan-2011 and engaged in wedding planning. Dreamy Bridal was known as "Dreamy Island Wedding Co Ltd" until last month (9-Feb-2012) and as "Jade International Develop Ltd" until 29-Dec-2011. The earlier name sounds like a shelf company name, so it is a fair bet that the Dreamy Bridal business is less than 3 months old.

Combined, in 2011 the target companies had unaudited revenue of HK$4.50m and a loss of $3.40m. In 2010, they lost $3.99m on revenue of $1.43m. They had net liabilities of $6.64m at 31-Dec-2011, although some of that may be a debt which Karrie would acquire. Both Angel Love Studio and One Travel appear to be at Shop G18, G/F, Golden Plaza, Mongkok, Hong Kong's wedding hub.

The price on this deal is HK$43m, to be satisfied with 130m shares @$0.346, diluting existing shareholdings by 14.98%. Even if we agreed with the business direction that Karrie is taking, we would see no reason to pay this much when Karrie itself could have started the same business and got to this stage for an investment of about HK$7.39m (assuming that the net liabilities minus the losses give the starting point at 1-Jan-2010). They are now trying to sell it for about 6 times the cost. Barriers to entry in wedding photography and wedding planning are almost zero, which is why so many wedding photographers and planners are self-employed or SMEs. The sale of wedding gowns and travel agency businesses are also easy to enter. The terms of acquisition are simply not fair and reasonable, regardless of what any two-bit independent financial adviser that they may hire will tell you.

So yes, "we know cause or just impediment why these persons should not be joined together". The dowry is too darn expensive. Your editor will vote against this transaction and urges all minority shareholders to do likewise. Karrie should break off her engagement because this wedding is not going to happen, if we have any say in the matter.

© Webb-site.com, 2012

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