Value Divergence, part 2
10th December 2009

The plot thickens at Value Convergence Holdings Ltd (VC, 0821). Readers will recall our article of 21-Sep-09, in which we queried whether any of the subscribers to the highly dilutive HK$300m/$600m convertible bond issue (with a conversion price of $1.00 per share) were also involved in the disposal of the 43.24% controlling stake (160.9m shares) in VC by Melco International Development Ltd (Melco, 0200) at $1.92 per share on 18-Sep-09.

When the circular to shareholders dated 15-Oct-09 came out, it was disclosed that one of the bond subscribers, for $50m, Right Source Investment Ltd (Right Source), owned 3.3m shares which it had bought in the Melco disposal. The circular also stated that another subscriber, for $10m, Highgrade Holding Ltd (Highgrade) was owned by Raymond Ting Pang Wan (Mr Ting), who also owned 22m shares, but he had not acquired the shares in the disposal. However, we note that he did acquire 20m shares at $1.92 on the same day (Tue-22-Sep-09) and at the same price as the disposal, and he did not own any other shares on 18-Sep-09 when Highgrade subscribed for the bonds, so the other 2m must have been bought on 21-Sep-09. These two shareholders were excluded from voting at the EGM, which on 2-Nov-09 approved the issue of the convertible bonds without objection.

The circular doesn't say who owns Right Source, but a disclosure filing shows that it is ultimately owned by an individual named "Long Ding Yun". The circular says (p23) that, apart from Right Source and Highgrade, there were 4 other subscribers which did not own any shares. Our analysis of disclosures suggests that this is incorrect and there were at least 7 subscribers in total, as we show below.

As we mentioned in the previous article, one of the subscribers was China Fortune Group Ltd (China Fortune, 0290) for $100m of the First Convertible Bonds. Since then, various disclosures of derivative interests in VC shares underlying the bonds, show that the bonds were subscribed as follows:

Note that the eventual amount of bonds per subscriber may double if the subscriber exercises his option to subscribe new bonds after converting the first bonds within the first year.

About the subscribers

We know nothing about Suen Siu Kwan or Terrence Chan Ming Leung - if you do, please tell us in confidence. But what we can tell you is that several of the subscribers have past dealings with one or more members of a network of companies, several of which featured in a series of 3 articles on Webb-site.com in June and July. The network includes (in order of stock code):

• The Hong Kong Building and Loan Agency Ltd (HKBLA, 0145)
• China Fortune Group Ltd (China Fortune, 0290)
• Asia Energy Logistics Group Ltd (AEL, 0351)
• PME Group Ltd (PME, 0379)
• China Public Procurement Ltd (CPP, 1094)
• ZZNode Technologies Co Ltd (2371)
• Heng Xin China Holdings Ltd (HXC, 8046)
• China Railway Logistics Ltd (CRL, 8089)
• China Bio-Med Regeneration Technology Ltd (8158)
• Byford International Ltd (8272)

Long Ding Yun, Right Source and China Fortune

Long Ding Yun was also once a subscriber of convertible bonds issued by China Fortune, which had a conversion price of $0.10 per share. He/she subscribed $12.5m of a $50m issue which completed on 19-Feb-09, the same issue in which PME subscribed $11.5m. PME also bought 53.738m shares in the market between $0.232 and $0.245 from 23-Feb-09 to 26-Mar-09.

On 6-May-09, China Fortune agreed to issue $32m of convertible bonds to PME, convertible at $0.16 per share, then a 44.8% discount to market. This was approved in an EGM of China Fortune on 29-May-09.

On 27-May-09, China Fortune agreed to issue $128m of convertible bonds to Jadehero Ltd (BVI, Jadehero), which is 60% owned by Tony Wong Kam Fat (Tony Wong) and 40% owned by either Ms Ha Ying Yim (if you believe note 2 on page 21 of the announcement) or by Mr Xia Ying Yan (if you believe note 2 on page 16 of the circular). Either way, we know nothing about her/him. The bonds are convertible at $0.16 per share, a 64.8% discount to market. Not only that, but Jadehero has an option to require China Fortune to issue another $128m of bonds on the same terms during the 12 months after the first issue, which completed on 6-Sep-09.

On 4-Jun-09, Long Ding Yun disposed of his China Fortune CB for $20m, or $0.16 per underlying share, a 66.7% discount to market. What a generous person he or she is. A filing shows that the bond was acquired by PME, which did not announce that deal.

Right Source was once owned by HXC, which used it on 29-Sep-08 to subscribe for $10m of convertible bonds of AEL (then China Sciences Conservational Power Ltd). On 21-Nov-08, HXC agreed to sell the bonds for $12.6m via Fortune Securities, which placed them in equal amounts with two "independent third parties", Gold Max Asia Limited and First Champion Worldwide Limited, without naming their owners. In fact, Gold Max was owned by PME and, as at 31-Dec-08, First Champion Worldwide was owned by CRL. According to note 38(a) of its annual accounts for the year to 30-Jun-09, HXC sold Right Source during the year for $14.163m, presumably to Long Ding Yun, or an intermediate owner.

On 14-Aug-09, PME converted $21m of its bonds into 210m shares, increasing its holding to 27.02% of China Fortune. It still had bonds convertible into 230m shares.

On 11-Sep-09, Tony Wong was appointed Chairman of China Fortune. He was Chairman of CPP until 4-Sep-09. We warned readers about that company on 3-Jul-09.

On 12-Nov-09, Jadehero converted $67.04m of bonds into 419m shares of China Fortune at $0.16, giving Tony Wong (via Jadehero) 29.95% of the company and diluting PME to 18.85%. Jadehero still has bonds convertible into another 381m shares, and an option to subscribe $128m convertible at $0.16 into another 800m shares. PME still has bonds convertible into 230m shares, of which 200m are at $0.16 and 30m at $0.10.

Altogether, at the end of Nov-09, there were 1,854.25m potential shares to be issued under convertible bonds and warrants of China Fortune (including the $128m of optional bonds), none of them above $0.16 per share. That would expand the issued share capital by 132.6%. It is mind-boggling that this stock still trades at $0.39 (9-Dec-09), despite the clear signal from the bond issue prices at $0.16.

Ni Rong Kun

Ni Rong Kun also owns 9.71% of HKBLA, since increasing from 4.8% in an off-market transaction on 1-Dec-09. Apart from that, we know nothing about him/her. See our separate story on HKBLA today for a warning of possible value destruction in progress.

Mr Ting

Mr Ting is the Chairman of China Motion Telecom International Ltd (CMT, 0989) since 14-Nov-06, and executive director since 23-Oct-06. For more on CMT's recent history, see our separate story today. The controlling shareholding in CMT is equally owned by Mr Ting and Yam Tak Cheung (Mr Yam). If that name seems familiar, Mr Yam was one of the subscribers of the convertible notes in our China Strategic Bubble story last month.

New NED

On 20-Nov-09, Betty So Wai Yee was appointed as NED of VC. She was an INED of CPP from 19-Nov-07 to 28-Sep-09.

The Melco disposal

Mr Yam was also one of the placees in the Melco disposal of VC, for 23m shares (6.19%). He sold 9m shares in the market on 24-Sep-09, cutting his stake below the 5% disclosure threshold. Another buyer in Melco's sale was Viola Mak Siu Hang, for 20m shares (5.39%). Like Mr Yam, she was also one of the bond placees in the China Strategic fund-raising.

Interestingly, on 24-Sep-09, ASM Asia Recovery (Master) Fund, and its manager Argyle Street Management Ltd, sold their entire 27m shares (7.27%) holding in an off-market transaction at $1.92, the same price that Melco got. We wonder who bought it. ASM had bought 22m shares in a placing at $2.20 on 10-Jul-07 and the other 5m shares in a placing at $4.20 on 6-Sep-07.

CB issue delayed - but why?

The shareholders' approval of the VC bond issue was the last condition precedent, and completion should have occurred on the next business day (3-Nov-09). However, on 3-Nov-09 VC announced that it had "been approached by certain Subscribers which have requested that the Completion Date be extended to facilitate their arrangements for completion". Presumably, in other words, to come up with the cash. On 30-Nov-09, VC announced that on that day, 1 of the subscribers, unnamed, had completed a subscription for $10m, but the remaining $290m was still not completed.

This was rather strange, given that all the conditions had been satisfied and that the shares closed at $1.97 yesterday (9-Dec-09), so the bond conversion price of $1 was deeply in-the-money. On the face of it, if they believe the share price is sustainable, then the bonds were highly attractive.

Last Friday (4-Dec-09), China Fortune put out an announcement, claiming that "As additional time is required for the fulfilment of the conditions precedent", it had entered into a supplemental agreement with VC to extend the completion date to 31-Dec-09. This contradicts the 3-Nov-09 statement by VC which implied that the conditions had been satisfied and it was only the subscribers who were asking for more time. One of them is not telling the truth.

The Stock Exchange should require China Fortune to state which of the conditions precedent has not been fulfilled, why it has not been fulfilled, and why they require more time.

On 8-Dec-09 VC announced that it had agreed with the other bond subscribers to extend the completion dates to 31-Dec-09.

© Webb-site.com, 2009