Recor Losses

Spare a thought for long-suffering shareholders of Recor Holdings. This company is now on its third controlling shareholder in two years, and original investors, who have seen their shares fall 94% since the 1993 IPO, have yet to receive a general offer. Mystery surrounds the ownership of two large blocks of shares, with the latest controller squeezing under the takeover threshold by purchasing 34.9% of the company at a premium.

Recor Losses
17th May 1999

Oh what a tangled web we weave - in our piece on Recor Holdings, we'll take you through this company's tortured history and bring you up to date with the events since its 1997 restructuring. In a strange sequence, directors have come and gone faster than typhoons in spring. The 1997 rescuers, who originally held 52.5% of the company, later transferred 15% to a director who resigned 9 days later. We don't know why he resigned so soon, or what happened to another 15% once held by the company's founder. This transfer, plus a small charitable donation, cut the rescuers' stake to 34.9%, just under the takeover threshold, allowing them to transfer control last week at a 154% premium to the market price without triggering a bid. But first, the background...

History

Recor was founded by James Hon Siu Chung in 1984 and listed on the SEHK on 13-Oct-93 with an IPO of 96m shares at HK$1.16 each, raising $98.1m net of expenses. The issue was 6.3 times over-subscribed. The group was then a manufacturer of consumer electronic products, mostly audio-visual, including TVs, VCRs, VCD players and music systems.

The year ended 31-Mar-94 was Recor's best and only profitable year as a listed company, with a net profit of $67.7m. The next year saw a small loss of $1.6m, and then in the year ended 31-Mar-96, a huge net loss of $125m on turnover which fell 24% to $791m. The group wrote off as an exceptional item $47m of development costs which had previously been capitalised.

The Chairman wrote "profit margin was...eroded by the soaring price of raw materials. Prices for plastics doubled in the first half of 1995." He reported a "sudden cancellation of orders from major customers combined with the collapse of existing markets devastated the Group's business plan and ruined its internal control systems...excessive raw materials were purchased and inventories were stocked up".

We find it puzzling that a collapse in orders could itself ruin internal controls - more likely that they were somewhat lacking in the first place, allowing stocks to build up ahead of firm orders. Stock levels at 31-Mar-95 had risen to $214m from $150m a year earlier. It is always a temptation to think that you can "time" the market by buying ahead of anticipated price rises, rather than matching raw materials with orders on a when-needed basis.

Mr. Lam Hing Ching, who was a director of Asia Commercial Bank, one of Recor's lenders, resigned as an independent non-executive director of Recor on 3-Aug-96. A few weeks later, on 28-Aug-96 the shares of the company were suspended at $0.155 due to the financial difficulty of RCR Electronics Manufacturing (RCRM), the Group's principal subsidiary, and a standstill agreement with its banks was entered into on 10-Oct-96. In what might be termed a pre-emptive strike, on 31-Jan-97 RCRM conveyed its fixed assets and stocks to Recor (RCR) Ltd, a BVI subsidiary of Recor, in partial settlement of debts due by RCRM for $69.4m. On 19-Mar-97, a Provisional Liquidator was appointed to RCRM after a winding-up petition from a creditor.

Restructuring and the Siu Brothers

A restructuring agreement was entered into on 12-Jun-97 and eventually the deal was announced on 3-Nov-97. In this deal, rescuers Siu Man Pau and his younger brother Siu Man Piu agreed through their company, Hoverton, to subscribe for 500m new shares at $0.12 per share, injecting $60m into the company. Hoverton then transferred 43.5m shares (5% of Recor) to founder James Hon, and he entered into a service contract with Recor, becoming Vice Chairman and MD but surrendering his Chairmanship to Siu Man Pau. The Sius then held 52.5% of Recor. Hoverton was advised by Lippo Securities while Recor was advised by Pacific Challenge Capital.

Under a scheme of arrangement of RCRM, the unsecured debts owed to banks and other unsecured creditors (excluding PRC creditors) totalling $137.6m were settled at 20 cents on the dollar, or a total of $27.5m, with $110.1m being written off.

(Sorry, we couldn't resist it). Only 3 of these, Asia Commercial, Kwong On and OTB, had been listed as "Principal bankers" in Recor's 1995-6 annual report. Standard Chartered also acted as Agent Bank in the restructuring. Mr. Hon transferred 60.7m shares (7% of Recor) to the Agent Bank in return for the banks waiving all his personal guarantees of Recor's debt to them. This reduced Mr. Hon's holding to 14.5%. The Banks agreed not to sell the shares (except to Mr. Hon) for a year, and then to give Mr. Hon first refusal. That period expired on 24-Mar-99, and we don't know whether the banks have dumped the stock.

If you are wondering what happened to the PRC creditors, who were excluded from the scheme of arrangement, take a look at our sidepiece on the company's property problems.

Parallel business

Siu Man Pau, his wife and the wife of Siu Man Piu were the sole owners of Botin Holdings, a private HK company which imports and distributes brand-name domestic electrical appliances. Siu Man Pau was President of Botin and his brother was MD. To keep Botin and Recor's business separate, it was agreed that Botin would in future be restricted to cameras, air-conditioners and personal stereo systems.

When the restructuring was completed on 24-Mar-98, Mr. Dennis Ho Chi Kuen, managing partner of solicitors K.F. Wong & Co, was appointed as a new Independent Non-executive Director, as was Mr. David Tiang Wei Ping. However, Mr. Tiang resigned the next day and was thanked for his "valuable contribution to the company". What a difference a day makes. At the same time, a new Executive Director, Mr. Hui Sui Lun, was appointed.

CD and DVD stamping

On 9-Dec-98 Recor agreed to lease an "ODC Mastering System" for the manufacture of CD and DVD disc stampers from a lessor who wasn't named. The lease was in the amount of HK$27.4m, payable over 16 months with interest on the outstanding balance at 1-month HIBOR +3% p.a.. There was a 30% down-payment and 15 equal monthly instalments.

The lessor, no doubt aware of Recor's history, required that during the lease, Recor shall not borrow from banks or financial institutions without the lessor's consent, and any money lent to Recor by the Siu brothers shall not be secured or repaid without the lessor's consent. In addition (known in the industry as the "belt and braces approach") the Siu brothers gave a personal guarantee to purchase the equipment if Recor defaulted on the lease. We don't know whether that guarantee is outstanding now that the Siu brothers have sold their stake in Recor.

...and the other half of the picture

It was another month before we learnt the other part of this picture. In an announcement on 6-Jan-99, Recor explained that most of the CD and DVD stampers to be produced by the equipment would be supplied to a company called Manwide Development, to enable it to produce CDs and DVDs. Manwide was "previously engaged in properties trading".

Manwide was owned as to 10% by Mr. Leung Chi Hung and 90% by Mr. Pan Zhi Qing. On 6-Nov-98, Manwide agreed to buy from Toolex (Hong Kong) Ltd 14 CD replication lines for US$5.99m (HK$46m), with a down-payment of 20%. The remaining 80% is payable from 31-Dec-98 in 2 monthly instalments of US$199,500 and 11 of US$399,000.

On 11-Dec-98 (2 days after Recor signed the lease for its ODC Mastering System), Manwide had agreed with a 100% subsidiary of Recor to purchase disc stampers for a period of 18 months from 1-Jan-99. Terms were not disclosed.

On 22-Dec-98, Recor agreed to guarantee the remaining US$4.79m (HK$37m), in return for a monthly fee of HK$400k for 12 months from 1-Jan-99. The guarantee fees amount to 13% of the initial amount outstanding, or 26% of the average amount during the term of the payments. The guarantee is effectively secured against the CD replication lines and the shares of Manwide.

Mr. Hui's shareholding

Mr. Hui Sui Lun was appointed an Executive Director of Recor after the restructuring was completed on 25-Mar-98. He had no shareholding at that time, but according to statutory disclosures, he acquired 151.9m shares from Hoverton (held by the Siu brothers), or about a third of Hoverton's holding, on 29-Dec-98 for $0.076 per share, or HK$11.54m. This gave him a 17.5% stake in Recor, and reduced Hoverton's stake to 35.0%.

9 days later, on 7-Jan-99, Mr. Hui resigned, a strange move for someone who had just acquired a 17.5% stake. A search through subsequent disclosures does not reveal any reduction in his stake. At the same time, Mr. Chen Zhi Qiang and Mr. Wong Hoi Ching were appointed as Executive Directors. We don't know anything else about them, or whether they have a shareholding, or whether they have any connection to the CD/DVD project, but they didn't stay long....

What's in a name?

Recor must be the only company in recent history to see shareholders veto a change of name. On 8-Jan-99, the board called a shareholders' meeting to change the company's name to "GB Int'l Holdings Limited". The reason was "to mark a change in the management of the Company since 7th January 1999 as well as to enhance its corporate image". What image consultant would come up with a name like that, apostrophe and all? On 2-Feb-99, the Special Resolution (which required a 75% majority of votes cast) was defeated.

We don't know who voted against the resolution. The founder and former Chairman, Mr. James Hon, resigned on 19-Sep-98 on health grounds, but remained a substantial shareholder through his company, Berwyn Ltd. In fact his stake was increased from 126.4m shares (14.5%) to 134.7m shares (15.5%) sometime between 30-Dec-98 and 8-Feb-99, when he reduced it back to the previous level. The meeting occurred between these 2 dates.

Later, on 27-Mar-99, the reasons for the proposed change of name became a little clearer. Recor announced that 4 out of the 5 employees of the marketing department had resigned on 31-Dec-98. 2 of them, together with 2 other ex-employees (who resigned on 31-Aug-98 and 1-Oct-98) from another department, had formed "Recor Trading Company" with the intention of promoting the products under the Recor trademark. They had effectively out-sourced themselves. The Recor brand accounted for 74% of Recor's turnover in the year to 31-Mar-98. So Recor has granted them a licence to use the brand for HK$1 per year until 31-Dec-2001 and an option to buy it for HK$300k. It appears that Recor had little choice, because sales under the brand collapsed to zero in Jan-99 and Feb-99. In future, Recor will have first refusal to manufacture brand orders generated by Recor Trading. However, the company admitted that "a lot of its products are old fashioned and lag behind the market trend". Don't hold your breath!

The Founder disposes of his stake

On 10-Feb-99, the founder, Mr. Hon, reduced his holding by 73.6m to 52.8m shares (6.07%). As this is below the 10% disclosure threshold, we don't know if the position has changed since. There were no transactions in the shares on either day in the stock market, so we can only assume that the block, equal to 8.5% of Recor (or more if the rest has been disposed of), went to one or more off-market private buyers. The price was not disclosed.

Recor changes control again, with no bid

On 7-May-99, the Siu brothers agreed to sell Hoverton to Mr. Cheung Ying Nang, making him the new controlling shareholder. That day, Hoverton donated 400,000 shares in Recor to a charity, reducing its holding to just below the 35% level at which transfer of Hoverton would have triggered a takeover bid. The resultant holding was 304.2m shares, or 34.96% of Recor. Mr. Cheung has a 30% stake in a Beijing joint venture which makes Video CDs.

The price of HK$45m equates to about $0.148 per Recor share, a 154% premium to the ten-day average closing price of $0.0582 up to 7-May-99, and also a 51% premium to adjusted unaudited net asset value at 30-Sep-98. Taking into account the $11.5m value of shares transferred to Mr. Hui in Dec-98, the Siu brothers had almost got their $60m investment back, excluding any salary they may have received from Recor.

The announcement dated 10-May-99 stated that Mr. Wong Hoi Ching and Chen Zhi Qiang had "been resigned" that day. They had only joined the board on 7-Jan-99. Both Siu Brothers will stay on at Recor, but Mr. Siu Man Pau has left the board and become deputy general manager. This means that any shareholding he may have in the future would not be discloseable. Neither brother had any holding immediately after the transaction.

Mystery surrounds the recent events. Are the Siu brothers still guaranteeing the lease on the ODC Mastering System? Does Mr. Hui still hold his 17.5% stake, and if not, who does? Why did he resign so soon after acquiring it? Who bought Mr. Hon's 8.5%-15.5% stake? As far as we know, nobody is acting in concert with Mr. Cheung. This is just as well, because if anyone was, then their combined stake might be above the takeover threshold.

As for the original IPO shareholders, if any are left, they have seen their $1.16 reduced by 94% to $0.065 and have only 6 cents of dividends (in 1994 and 1995) to show for it. That's what we call a Recor loss.

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Recor Losses 17th May 1999