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Singapore Hong Kong Properties
7th July 1999

We wrote in May about the Hong Kong placing game, in which companies can go on pumping out new issues by placings to selected investors without offering the stock to existing shareholders, thereby diluting their interests. Here we highlight a classic example of this: Singapore Hong Kong Properties Investment (SHKP). This company (which incidentally, has no properties in Singapore) is now seeking its 5th general mandate in a year, and has conducted 7 placings in the space of 4 months, increasing the issued share capital by 193%, and as we will show, diluting pro forma net asset value by 45% in the process.

Bear with us as we take you through the colourful history of this company.

History

Until 1997 this was a sleepy property company controlled by the Lin family. It owned two investment properties. The major one was several floors of Golden Plaza, 745-747 Nathan road, Mongkok, Kowloon (home to bridal and evening gown shops), and the other was 4 shops on the Ground Floor of Odeon Building, 28 Shu Kuk Street, North Point.

In addition to the properties, SHKP had two other businesses. Wing Sang Cheong, a grocery wholesaler founded in 1911 and acquired in 1991, and China Coast Development, a wholesaler of industrial paper. A third business, Oriental Travel Service, was closed in 1996.

Then on 21-May-97, during the height of a bull run, a company called Permek Venture Ltd (PVL) announced a memorandum of understanding, which was followed on 6-Jun-97 by an agreement to purchase the Lins' 62% stake in SHKP for HK$7.6237 per share, or a total of $314.5m. This implied a value of about $60m for the listing status.

The change of control would have triggered a general offer at that price. However, on 4-Jun-97, the share price suddenly took off from $7.00 and closed at $10.00 per share, up 43% in heavy volume. The shares were suspended the next day and the SFC "conducted enquiries into the unusual trading activities in the shares". After almost 6 months, the suspension was removed on 1-Dec-97.

As part of the deal, SHKP sold back to the Lin family the two non-property businesses (the grocer and the paper trader) and some furniture, all at net asset value, for a total of $28.17m. This was approved by minority shareholders.

About Permek Venture

PVL was ultimately 55% owned by Mr. Chan Yuen Ming and 45% by Mr. Benny Kwong Kai Sing. Mr. Kwong was an Executive Director of HK-listed Fairyoung Holdings from Feb-93 until his resignation on 3-Nov-97.

The HK stock market crashed in Oct-97, while SHKP was suspended. On 21-Nov-97, Mr. Kwong's interest in PVL was acquired by Mr. Chan for $13.4m, or $0.72 per SHKP share, in addition to the price which PVL would pay the Lin family. This resulted in a total price of about $8.3437 per share. After "discussions" with the SFC, PVL decided to "voluntarily" increase the offer price to $8.35 per share.

Mr. Chan is the brother of Jimmy Chan Yuen Tung, who was an Executive Director of HK-listed money-lender DC Finance until he resigned on 1-Feb-99. We'll take a look at that company in a future article. An announcement on 28-Nov-97 stated that the brothers were discussing Jimmy Chan's purchase of up to 49% of PVL, and that if agreement was not reached, then Chan Yuen Ming would continue discussions with other potential investors.

Mr. Chan Tries to Sell

As of 16-Jan-98, Mr. Chan was still in discussions with his brother as well as with an independent third party.

On 19-Jan-98, the offer document for SHKP was finally dispatched. The adviser to PVL was The New China Hong Kong Corporate Finance, while Somerly advised SHKP and Asia Financial Capital advised the independent directors. Mr. Chan was described as having an investment portfolio which included "mostly luxury residential properties and grade A commercial properties" which comprise "individual units and entire buildings, and various residential and commercial development sites".

On 5-Feb-98, minority shareholders of SHKP approved the sale of the two businesses to the Lin family, allowing the offer to proceed. PVL completed the purchase of the controlling stake on 14-Feb-98 (love was in the air). PVL nominated two directors to SHKP, Ms. Yvonne Louie Mei Po, and Ms. Irene Wong Shin Ling, both of whom were directors of DC Finance until 1-Dec-98 and 1-Feb-99 respectively. We don't know why Mr. Chan did not go on the board of SHKP himself, or whether or not DC Finance was involved in funding Mr Chan's offer.

On 2-Mar-98, the offer closed and the board (including the independent directors) resigned. Acceptances were received for 15.99% of the company, increasing PVL's stake to 78.26%. Mr. Chan was still in negotiations with his brother and an independent third party.

On 12-Mar-98, PVL sold 3 million shares at $8 per share to Hong Kong Party Limited (yes, that's its real name), cutting its stake to 73.74% in order to maintain the free float of at least 25%. We don't know who owned the purchaser, but they were held to be independent.

On 22-Apr-98 the shares were suspended and an un-named "Potential Purchaser" signed a conditional agreement to purchase from Mr. Chan (via PVL) his stake in SHKP, by now reduced to 64.23%, and at the same time SHKP had conditionally agreed to sell one of its properties to Mr. Chan and purchase a property from the would-be new controlling shareholder. However, one of the conditions was not fulfilled and the deal was scrapped on 1-May-98, when it was also announced that PVL was continuing negotiations with independent third parties including the Potential Purchaser. The shares began trading again on 4-May-98.

Enter Kong Tai

On 12-Aug-98, HK-listed Kong Tai International announced that it was purchasing Mr. Chan's entire interest in SHKP, for $7.55 per share, or a total of $321m. That's 9.6% less  than the $8.35 per share that he paid for it.

Of the $321m, $70m was satisfied by the issue of 350m Kong Tai shares at $0.20 each, and the balance of $251m was in cash.

As part of the deal, Mr. Chan acquired the holding company of SHKP's major asset, the Golden Plaza shopping centre. The property was valued by Brooke Hillier Parker at $350m at 30-Jun-98, down 17% from its $420m valuation by Richard Ellis at 30-Nov-97. The holding company had almost no net debt, so the purchase price (net asset value) came out at $348m.

At the same time, SHKP agreed to buy two properties from Kong Tai.

Click here to skip to the summary

The first property was a site at 46-48 Anchor Street, Tai Kok Tsui, Kowloon, with an area of 3,840 sf. It was acquired by Kong Tai in Mar-94 and was vacant, with the intent to develop a 17-storey shop/office building with a gross floor area of 45,800 sf. It was valued by Francis Lau & Co. at $125m at 3-Jun-98, or an accommodation value of $2,729 psf. The estimated construction cost was a further $50m.

The second property was at 60-66 Baker Street and 2-6 Baker Court, Hunghom, Kowloon, with a site area of about 6,500 sf. The site was a vacant site (except for No. 6 Baker Court). The site was intended for development into a 31-storey residential/commercial building with a gross floor area of 59,277 sf. It was valued by Francis Lau & Co. at $240m at 3-Jun-98, or an accommodation value of $4,049 psf. Construction cost was estimated at $60m.

The holding company of this property, Charter National, was acquired by Kong Tai pursuant to a provisional agreement on 16-Oct-97, valuing the property at $233m, from Wai Son (H.K.) Development Ltd. We don't know who owns Wai Son. A $10m deposit was paid on 23-Sep-97 and a further $36.6m on 6-Oct-97, just before the market crash, so it appears that the deal was struck before the crash, on the basis of a valuation by Francis Lau & Co. dated 25-Sep-97. The deal did not include No. 6 Baker Court, which was presumably acquired later - the site area acquired in this deal was only 5,525 sf. Charter National had entered into various agreements to purchase the properties which make up the site. Completion of the deal took place on 2-Feb-98, and Kong Tai arranged a secured loan of $150m from Wing Hang Bank.

The Anchor Street and Baker Street properties acquired by SHKP from Kong Tai were held by companies which had various net liabilities to be deducted from the valuations, reducing the consideration by $100m to $275m.

Summary

So in this deal, Mr. Chan spent $348m on the company which owned Golden Plaza, partly financed by the sale of his stake in SHKP to Kon Tai, for $251m in cash and $70m in Kong Tai shares.

At the same time, Kong Tai off-loaded vacant properties valued at $375m and other net liabilities of $100m, in return for a cash payment of $275m, of which $251m went to Mr. Chan. The deals were completed on 25-Sep-98.

What did Mr. Chan do with Golden Plaza? The same asset was sold by an un-named "independent third party" to HK-listed Island Dyeing and Printing (IDP) on 30-Apr-99. We don't know whether Mr. Chan was the vendor or whether he sold it to someone else in the intervening period. This time, the property was valued at $375m at 28-Apr-99 ($25m more than in the earlier transaction), but the purchase price was based on a value of $370m. Other net liabilities of the holding company (presumably including a mortgage) reduced the purchase price to $210m.

Stock split 40:1

Under its new ownership, SHKP made a massive 40 to 1 share split, reducing the par value to $0.025 per share but only increasing the board lot from 10,000 shares to 80,000 shares, effectively 5 times smaller than before.

General Offer

Kong Tai made a mandatory general offer through Core Pacific-Yamaichi and Kim Eng Securities at $7.55 per SHKP share, which ran from 28-Sep-98 to 6-Nov-98. SHKP shareholders were also offered an alternative of $5.95 per share plus 8 new shares of Kong Tai valued at $0.20 each.

The stock split made SHKP a penny stock, reducing the effective offer price from $7.55 to about $0.189. The shares now trade at about $0.05.

The share price jumped some 53% in the last 2 days of the offer period, closing at a $13.80 (or split-adjusted $0.345) on the last day, 6-Nov-98. However, most shareholders seemed to have already accepted by this time, as the offer closed with acceptances of 31.60%, taking Kong Tai's holding up to 95.86%.

That means there were only 2.74m shares in public hands, so it's quite impressive that 6.08m shares were traded in the 2 days prior to the close of the offer. Since trades are settled on day T+2, it woud not be possible to purchase on those 2 days and accept the offer. On 12-Nov-98 SHKP said that the SFC was conducting enquiries into the trading activities of the SHKP shares prior to the close of the offer.

None of the accepting shareholders took the alternative of shares in Kong Tai.

Sell-down

In order to meet the Stock Exchange requirement of 25% public float, Kong Tai arranged placings of existing shares through Goodwill Investment Services and Peace Town Securities on 7-11-Nov-98 to "independent professional and/or institutional investors", reducing its stake to 73.74%.  Of these, 12.466m shares were placed by Goodwill at $7.55, while 2.19m shares were placed by Peace Town at $7.00.

New board

On 25-Sep-98 the 4 executive directors of Kong Tai joined the board of SHKP along with independent director Mr. Clive Oxley, who  was also an independent non-executive director of Kong Tai.

On 9-Nov-98 the directors who were appointed by PVL (including the independent directors) resigned and another Executive Director was appointed. On 1-Dec-98, Mr. Oxley shifted from being an independent  director of Kong Tai and SHKP to be an Executive Director of SHKP. Mr. Oxley is a former 25-year civil servant, retiring in 1994 as Commissioner for Customs and Excise and was formerly Deputy Secretary for Planning, Environment and Lands.

Also on 1-Dec-98, Mr. T H Barma was appointed as independent director of SHKP. On 21-Jun-99 Mr Barma became an independent non-executive director of HK-listed CIG-WH International, of which Mr. Oxley is also an independent director.

First Placing

It was at this point in the story that SHKP began pumping out new shares like confetti.

On 3-Mar-99 SHKP placed 520m new shares through Quest Stockbrokers (HK)  at $0.03 per share, raising $15.6m gross, $14.2m net. This was equivalent to 19.62% of the issued shares, just under the 20% limit under the general mandate granted to the board at the AGM on 23-Jun-98. The intended use of proceeds was "to acquire utility and/or other projects which can generate steady and recurrent income" (our emphasis). This was the first hint of a move away from what they said in the earlier offer document, namely that SHKP "will be principally involved in property development and construction... with plans to diversify into investment in utility projects (such as power and water plants)"

Flirtation with Pacific Century

On 27-Mar-99, Kong Tai said that it had been in discussions with Pacific Century Group about the possible sale of a controlling interest in SHKP. These discussions started around 5 p.m. on 24-Mar-99. The shares had risen over the preceding 3 days by 97% to $0.063, in heavily increased volume. Kong Tai had made formal statements on 22-24-Mar-99 denying knowledge of any reason for the increase, and maintained their innocence in the 27-Mar-99 announcement.  In any event, the discussions were short lived, terminating without agreement on 26-Mar-99. PCG later went on to cement a deal with Tricom.

Second Placing

On 7-Apr-99, SHKP gave notice of an EGM, which was held on 23-Apr-99 to approve a new general mandate.

On 24-Apr-99, SHKP placed 630m new shares through KG Investments Securities (Hong Kong) at $0.04 per share, raising $25.2m gross, $24m net. This was equivalent to 19.88% of the latest issued shares, nearly exhausting the general mandate granted just a day earlier. The company said it was "currently exploring various investment opportunities, including high technology projects and telecommunications business". It had commenced negotiations on several such projects.

On the same day, Kong Tai announced that it had since 29-Mar-99 (the first trading day after the talks with PCG were scrapped) sold in the market a total of 588.9m shares for net proceeds of about $26m, or about $0.044 per share. This reduced its holding to 30.8% after the second placing. The reduction through the 50% level, which took place on 30-Mar-99, also constituted a "Discloseable Transaction" under the Listing Rules for Kong Tai which they had failed to announce earlier.

Third Placing

On 30-Apr-99, SHKP gave notice of another EGM to be held on 19-May-99 to approve a third general mandate.

On 11-May-99, SHKP announced it was in negotiation to acquire "certain properties" from Kong Tai  and was considering a further placing of 750m new shares.

On 12-May-99, SHKP placed 750m new shares through ICEA Capital at $0.05 per share, raising $37.5m gross, $36m net. These shares, equivalent to 19.74% of the issued shares, were subject to approval of the third general mandate, which was given a week later. So they'd basically exhausted the mandate before it was given. This time, the company said that in addition to the "high technology projects" it was also looking at "cement plants" in the PRC and other properties held by third parties. It also warned of possible further share issues.

Fourth Placing

On 14-May-99, SHKP placed 1,700m new shares, half through BOCI Securities (part of Bank of China) and half through Quest Stockbrokers (HK) (a repeat order here) at $0.05 per share, raising $85m gross, $82m net. The share issue was equal to 37.36% of the issued shares (including all previous placings) and was subject to specific approval in an EGM.

Serviced apartments

On 27-May-99, SHKP and Kong Tai announced that their results for the year ended 31-Dec-98 would be delayed because arrangements had only just been made to inspect the accounts of four subsidiaries of SHKP which were sold during 1998 prior to Kong Tai taking control. At the time of writing, the results are now scheduled to appear on 26-Jul-99 and may contain an audit qualification if work cannot be completed in time.

Also on 27-May-99, SHKP announced it had agreed to acquire a property known as "Hong Kong 26 Court" at 5B Chancery Lane, Mid-levels for $72.8m from a company called Right Centre International. We don't know who owns that, but it was held to be independent. The property is a serviced apartment block with a gross floor area of 12,829 sq ft, so the price was $5,675 psf. SHKP intends to obtain a $40m mortgage loan from an independent financial institution. The vendor has agreed to lease the building back for 2 years at a monthly rent of $375k inclusive of rates and management fees, payable semi-annually in arrears.

Fifth Placing

On 2-Jun-99, the EGM approved the placings of 14-May-99 and in addition, granted a fourth general mandate to issue a further 20% of the fully-enlarged capital.

The next day, on 3-Jun-99, SHKP placed 720m new shares through Vickers Ballas Hong Kong at $0.05 per share, raising $36m gross, $35m net. The new shares represent 11.52% of the existing issued shares.

This time, the announcement spoke of intentions to diversify into "hotels, management of service (sic) apartments and hotels, car parks", in addition to the fields mentioned previously.

Sixth Placing

On 16-Jun-99, SHKP placed 520m new shares through ICEA Capital at $0.05 per share, raising $26m gross, $25m net.  The shares represent a further 8.32% of the shares in issue at the date of the fourth general mandate, taking the total issued since then to 19.84% and practically exhausting the mandate.

Bizarrely, the announcement contained news that on 12-Mar-99 SHKP had spent $13m on 15% of a business which engages in the repair, maintenance and overhaul of civilian registered aircraft in Tehran, Iran.

It also revealed that on 1-Jun-99 the company spent $42.5m on a 60% interest in a cement plant in Beijing. Although technically too small to be a "Discloseable Transaction" under the Listing Rules, we think this should have been announced before the Fifth Placing which took place two days later.

Similarly, the announcement revealed that $14m had been spent on 12-May-99 on the acquisition of 80 car park spaces at Covent Garden, 88 Ma Tin Road, Yuen Long ($175,000 per space).

All these acquisitions were from un-named "independent third parties". So now we know that the "intention" to diversify into car parks and cement plants, referred to in the placing announcement on 3-Jun-99, was in fact already a reality at that time.

Seventh Placing

On 24-Jun-99, SHKP placed 280m new shares through BOCI Securities at $0.054 per share, raising $15.12m gross, $14m net. Note that in all but the first placing, the net proceeds have been rounded to the nearest million, so it is not possible to know what percentage was eaten up in expenses. In the first placing, this was 9.0%.

This placing is subject to approval in an EGM to be held on 12-Jul-99. At the same meeting, a fifth general mandate will be sought. We have no idea who has been buying all these new shares, but if you held 1% of the company at the beginning of this year, you have now been diluted by 66% to only 0.34%. That's because, of the shares issued or to be issued, 66% have been issued through the seven placings. This is shown in the table below:

Dilution of Net Asset Value

There are now more shares in SHKP than there are people on this planet. When Kong Tai first bid for SHKP, the offer document dated 7-Sep-98 contained a pro forma statement of net assets of SHKP at 30-Jun-98. The pro forma NAV per share of SHKP was $5.59 (or $0.140 per split share). Since then, the 7 placings have diluted the NAV per share by 45% to $0.077 per share. Existing shareholders have been entitled, as they would be in a rights issue, to participate in these dilutive issues. The dilution is shown in the table below:

Purchase of property from Chairman

At the same time as the 7th placing, SHKP said it had conditionally agreed to buy two properties in connected transactions.

Click here to skip to the summary

First property

A 100% interest in a property at 73 Mount Kellett Road (formerly known as 5 Cameron Villas), The Peak to be purchased from Holly Smart Investment, which is 100% owned by the Chairman of SHKP and Kong Tai, Mr. David Wong Wai Chi, and his wife.

The property is a 14,217 sf site which currently has a vacant 2-storey European-style "semi-detached" house with private garden, garage and a guardhouse. SHKP intends to redevelop it into 3 detached houses with total floor area of 11,000 sf. There's no word on what will happen to the other part of the building, which presumably will become "detached" rather than semi-detached!

The transaction will require minority shareholders' approval in SHKP. The valuation of the site in the transaction is $128m, which equates to $11,636 psf. Add on demolition and construction costs, and this property is not cheap. Shareholders should think hard before voting on this.

A secured bank loan of $79.7m is included in the deal, and other net liabilities of $6.7m reduce the consideration to $41.6m.

Second property

A 100% interest in the 3rd-6th floors of Lisa House, 33-37 Nelson Street Kowloon which comprises about 108 rentable car parking spaces, to be acquired from Kong Tai, valued at $73.4m on 31-May-99 (or $680k per space). The car park was leased to an operator at $620k per month on 9-Jul-97 but the operator has defaulted and a court has ordered vacant possession. Kong Tai has agreed to take care of this and has also guaranteed rental of $300k per month for the first 12 months after the purchase, or a gross yield of 4.9%.

A secured bank loan of $44.0m is included in the deal, and other net liabilities of $340k reduce the consideration to $29.0m.

Transaction summary

SHKP is being asked to take on properties valued at a combined $201.4m from Kong Tai and its Chairman. This figure is not far off the net $230m raised in the 7 placings so far this year. Both transactions are subject to minority shareholders' approval at an EGM, the date of which has not yet been announced.

Our view

Minority shareholders have an opportunity to say "enough is enough" and vote against the 7th placing and the new general mandate on 12-Jul-99, as well as against the purchase of assets from Kong Tai and its Chairman in the subsequent meeting.

Shareholders have seen pro forma net asset value diluted by about 45% by these 7 placings. Their shareholdings have been diluted by over 66%. We have never held shares in either company, but if you do, exercise your rights and vote against the transactions.

Thanks to the earlier sell-down and the dilution by the first 6 placings, Kong Tai's stake in SHKP has been reduced to just 15.63%. If the other shares are in the hands of independent third parties then it should be easy to out-vote Kong Tai in  a general meeting.

Stop press:

Volume in the stock today (7-Jul-99) reached 718m shares, equivalent to 9% of the company, with the price up 17% at $0.055. If the new general mandate is approved on 12-Jul-99, and if past performance is any guide, you can expect another placing the next day.

© Webb-site.com, 1999

Related Article

The Placing Game, 17-May-99

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