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The Shenzhen Connection
20th March 2003

H-Share issuer Shenzhen Expressway Company Limited (SEC, 0548) today announced that it has sold its franchise on two toll roads back to its ultimate controlling shareholder, the Shenzhen Municipal Government (SMG) for RMB1,930m, mostly payable later. In fact, SMG took over the toll operations on Tuesday night, 18-Mar-03. Nice of them to tell us.

We are not going to dig deeply into the merits or demerits of the deal, but the key travesty here is that the deal has been classified by the Stock Exchange of Hong Kong (SEHK, a subsidiary of HKEx) as only a "Discloseable Transaction" (due to its size) but not as a "Connected Transaction". As such, the deal is not subject to minority shareholders' approval or veto. Put simply, SEHK does not think that the SMG is related or "connected" to SEC, a fact which should be obvious to any reader.

SEC is 30.03% controlled by Shenzhen International Holdings Limited (0152) which in turn is 44.26% controlled by the SMG. That means that SEC is dealing with its ultimate controlling shareholder. "Control" is defined in the Listing Rules and Takeover Code to be a shareholding of 30% or more.

In addition, SMG has a 20.99% holding in SEC, so SMG is a "substantial shareholder" (one who owns more than 10%) of SEC in its own right. This takes its total voting interest to 51.02%. In a hair-splitting exercise, the announcement contains a chart which purports to show that the 20.99% stake is under 3 layers of "supervision" - a holding company under the Roads Bureau, under the Communications Bureau, under the SMG. This makes no difference - the stake is clearly a government asset. 

We first objected to the SEHK's treatment of relations between listed companies and their governmental shareholders in 1998 when we complained that the Beijing government had siphoned IPO cash out of Beijing Enterprises Holdings Ltd (BEH) for use in the government's water company, again without minority shareholders' approval. After that, on 26-Apr-99 the SEHK changed its rules and inserted the following giant loophole in Rule 19A.21:

"the Exchange will normally not treat a PRC Governmental Body... as a connected person of a PRC issuer"

Investors take note, because this strips you of all protections you might expect when a government starts to interfere with the operations of a listed company which it in reality controls. This disgraceful episode is documented in our article the The Beijing Siphon and is another example of how the SEHK has put the wishes of controlling shareholders above those of investors, and why it must be stripped of its regulatory role. It was true 5 years ago, and it is true today.

Because of an obscure clause in the Articles of SEC, the sale of more than 33% of its fixed assets does require shareholders' approval in general meeting, but the SMG has control over 51.02% of the votes so the outcome is not in doubt.

You may or may not think that SEC is getting a good deal, but if you are a minority shareholder, you will have no say in the matter. For the record, though, the terms look uncommercial to Webb-site.com, because:

1. The price of RMB1,930m is payable in instalments over almost 3 years. Only 25% is payable within 10 days of signing, 25% by 31-Dec-03, 30% by 31-Dec-04 and 20% by 31-Dec-05.

2. The transfer of title to the roads will take place 10 days after signing, even before the shareholders' meeting (even though we know that SMG will approve it). SEC is not granted any security over the roads to ensure payment of the remaining 75%. SEC says that SMG has "certain credit standing" - but if that is the case, then why doesn't SMG pay the whole amount up front and borrow from the banks?

3. The SMG took over operation of the toll roads (including employees) at midnight on 18-Mar-03, the date the deal was signed, before any payment had changed hands, before the title had been transferred, and before the deal had even been announced. Done deal.

Imagine the outcry if the Hong Kong Government (or one of its bureaux) announced that it had taken back the MTR rail operations last Tuesday at a price of its choosing and without minority shareholders' approval. Clearly this would break the Listing Rules, and someone might even be held accountable. So why does HKEx think that the Shenzhen Government should be treated any differently?

Copyright Webb-site.com, 2003

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