Tongda and Templeton
30 March 2013
Templeton's confidence
On 17-Dec-2012, Tongda Group Holdings Ltd (Tongda, 0698) put out a press release titled "Templeton Strategic Emerging Markets Fund IV, LDC becomes a strategic shareholder of Tongda Group". On 11-Dec-2012, Templeton had bought 300m shares (6.3%) of Tongda from one or more third parties. The press release quoted Chairman Wang Ya Nan (Mr Wang) saying:
"This investment demonstrates Templeton's confidence in the prospects of Tongda Group...".
The press release also contained glowing praise from Mark Mobius, executive chairman of Templeton Asset Management Ltd, which runs the fund:
"We are delighted to be a strategic shareholder of Tongda Group. The company is a leader in in-mould lamination (IML) technology for decorative components in China, with a very strong competitive position and a broad base of satisfied customers. Considering the huge and growing Chinese handset market as well as increased penetration of Chinese brands in global markets we are very positive on the potential growth in Tongda's business in the coming years, and hope that our support will enable the company to reach new heights."
In its 2012 results announcement on 14-Mar-2013, Tongda's Chairman said:
"For the Year, Tongda Group succeeded in attracting Templeton Strategic Emerging Markets Fund, a major global investment fund, to become our strategic shareholder, which fully demonstrates the confidence the investment community has on the Group's core advantages and prospect." (emphasis added)
So that all sounds pretty positive; the share price rose 70.1% from $0.335 on 14-Dec-2012 (before the press release) to $0.57 ahead of the results on 14-Mar-2013. Dr Mobius is a famous emerging markets investor, and Templeton often backs winners.
What they didn't tell you
Here's the catch: neither the press release nor the results announcement mentioned that Templeton also had a derivative short interest in the same number of shares. The disclosure of interests shows a purchase price of $0.31 (off-market, a 7.5% discount to the $0.335 closing price) and a short interest in the same number of shares, "code 403" - a physically-settled unlisted derivative. On the same day, Mr Wang filed a disclosure that he had a new derivative interest in the same number of shares, exercisable between 11-Dec-2015 and 25-Jan-2016 at an unstated price. It was "code 409" - a physically-settled option, but it was unclear whether this was a put option (someone's right to sell to Mr Wang) or a call option (Mr Wang's right to buy from someone).
Regulatory note: the derivative coding system is different between directors and substantial shareholders, with the former providing more detail: in our view substantial shareholders should provide the same detail as directors, and the system should distinguish clearly between puts and calls.
On 18-Mar-2013, after the results, Webb-site filed a complaint with SEHK and the SFC, calling on the company to clarify the situation. At 21:12 on Thursday evening, ahead of the 4-day weekend, Tongda filed an announcement revealing that Mr Wang had granted a put option to Templeton (also known at various points in the announcement as "Templetion", presumably rhyming with completion), exercisable for 45 days after the 3rd anniversary of the investment.
The terms of the put option, if correctly stated, are so complicated that after reading it 10 times we are still not sure that we understand it - but it appears that Templeton is guaranteed a 15% IRR (internal rate of return) on the investment. It doesn't say "per annum" or "annually" but that is normally how IRRs are measured. Compounded for 3 years, that's a 52.1% return, equivalent to a rise in the share price to $0.472 before dividends. It appears that not more than 1/3 of this return can comprise dividends - so if the company pays more dividends than that, then it doesn't count towards the 15% IRR.
So how confident was Templeton in Tongda? So confident, that in order to make an investment, they had to be granted a put option that not only guarantees that they get their money back if the stock falls, but also promises a 52% return (assuming Mr Wang honours the terms), even if the share price does not rise. Mr Wang has engaged in the somewhat desperate tactic of trying to buy respect. In the words of the ancient philosopher Paul McCartney, "money can't buy you love". Perhaps Mr Wang should grant the same put option to all shareholders, then we can all be more confident. He could do that with an undertaking to make a general offer on 11-Dec-2015 at $0.472 (less dividends), the same deal that Templeton got.
The investment with a put option does not "demonstrate Templeton's confidence" let alone "fully demonstrate the confidence the investment community has" in Tongda - it shows Mr Wang's confidence in his company's stock price, and possibly that Templeton trusts Mr Wang to honour the put option - but that is all. Thursday's announcement also reveals that Mr Wang, who with his brothers owns a majority shareholding in the company, has undertaken to appoint an individual nominated by Templeton as a non-executive director of Tongda - but so far that has not happened.
In our view, the press release and announcement were "misleading through the omission of a material fact", namely the put option, and the misleading statements were likely to induce people to buy the shares. That is an offence under s298 of the Securities and Futures Ordinance, punishable on indictment by a fine of up to $10m and up to 10 years in jail. Although the source of the press release is stated as Tongda, it was clearly endorsed by Templeton, as it included quotes from Dr Mobius, information on Templeton, and a corporate communications contact there. That makes both companies and the individuals involved liable to prosecution.
Incidentally, we don't know who sold the shares, but as it was above the threshold of 5% and nobody else disclosed an interest, either there was more than one vendor (each below 5%), or someone breached their disclosure obligations.
© Webb-site.com, 2013
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