E. Bon bonus beggars belief
19 February 2016
On 19-Jan-2016, interior hardware vendor E. Bon Holdings Ltd (E. Bon, 0599) announced a proposed a bonus issue of 1 new share for every existing share held, halving the share price from $1.29 to a theoretical $0.645 and the 2000-share board lot to HK$1290, which is below the $2000 required/suggested by the Stock Exchange in its Guide on Trading Arrangements for Selected Types of Corporate Actions (MS Word format). No, it's not a Listing Rule, but it is part of an increasing paraphernalia of Guidance Letters and Other Guidance Materials through which the Stock Exchange avoids the proper process of actually amending the Listing Rules, which would require market consultation and SFC approval.
So yesterday, 18-Feb-2016, E. Bon announced that it in addition to halving the share price with the bonus issue, it would also double the board lot size from 2000 to 4000 shares, so that the expected board lot value would be unchanged. The timetable still provides a 14-day period in which the shares will trade "ex-bonus" on the old board lot size, and therefore at half the value per board lot, but the Exchange doesn't seem to mind that.
The stated "Reasons for the proposed Bonus Issue" are the usual nonsense accompanying such proposals:
"The Bonus Issues marks the 40th anniversary of the establishment of the Group in Hong Kong. In addition, the Board believes that the Bonus Issue is a reward to the continuing support of the Shareholders by allowing them to participate in the business growth of the Company by way of capitalisation of a portion of the share premium account and will be a return to the long-term support of the Shareholders; and that the Bonus Issue will also enhance the liquidity of the Shares as the number of shares to be held by the Shareholders will increase."
This was a statement of beliefs without foundation in fact. It is, in our view, a misleading statement. The bonus issue is certainly not a "reward", because shareholders will be no better off, and in fact their company will incur expenses for the bonus issue. Shareholders are already able to "participate in the business growth of the Company" (if any), and the bonus issue adds nothing to their percentage participation. For the same reason, there is also no reason to believe that the bonus issue will provide a "return".
The directors fail to state why they believe any of these things. They either understand so little about finance that they are incompetent to be directors, or they don't believe this, in which case the statement is false as well as being misleading. Finally, given that the value of a board lot will now be unchanged, there is no reason to expect the bonus issue to "enhance the liquidity".
In fact, there is a very good reason to believe that the bonus issue will decrease liquidity. Under the SEHK Spread Table,, between $0.50 and $10.00, the minimum bid-offer spread is $0.01, so by halving the share price but staying in that range, the bid-offer-spread will double from an already-wide 0.78% to a truck-wide 1.55%. Wider spreads reduce liquidity (measured by dollar turnover), because potential buyers and sellers tend to queue up facing each other rather than "jump the spread". If the equilibrium price lies somewhere between the best bid and offer, then less business gets done. Put simply, they cannot meet in the middle.
The bonus issue is subject to shareholders' approval. The SFC and Stock Exchange should require E. Bon to:
- withdraw the misleading statement;
- disclose to shareholders that the trading spread will increase, which is likely to decrease liquidity; and
- either withdraw the proposal or explain why the directors believe that it is in the interests of shareholders to decrease liquidity and also incur the costs of the bonus issue.
E. Bon is far from alone in this tawdry practice of trying to attract investors with a lower nominal share price achieved through stock splits or bonus issues, but if they think investors are that stupid then they should explain why.
© Webb-site.com, 2016
Organisations in this story
Topics in this story
Sign up for our free newsletter
Recommend Webb-site to a friend
Copyright & disclaimer, Privacy policy