Kwong Hing's History
9 March 2004
Kwong Hing International Holdings Ltd (Kwong Hing, 1131) has been in the news the past few days as the Independent Commission Against Corruption (ICAC) arrested one of Kwong Hing's executive directors on 27-Feb-04 for alleged corruption in relation to suspected share price manipulation.
According to the ICAC, in Jul-03, an executive director of the listed company, through the arrangement of a director and an investment adviser of a financial institution, allegedly struck a corrupt deal with a fund manager for arranging the funds managed by him to buy over 10 million shares of the company. It was suspected that over HK$2m had been shared between the fund manager and the two middlemen as rewards.
It was also alleged that the executive director of the listed company had offered a cash payment to a research executive of another financial institution for the latter to publish a favourable research report on the listed company.
The financial institution was identified by media as SBI E2-Capital (which is 49% owned by E2-Capital Holdings Ltd, 0378, 49% owned by Softbank Investment International (Strategic) Ltd, 0648 and 2% by Mr Wong Sin Just). The firm has sacked investment banking director Louis Lin and suspended senior vice president Vincent Yum. The research executive involved in the investigation is Nicholas Tan Chye Seng, who has been suspended by UBS Securities Asia Ltd.
He is reportedly the son of Mr Tan Heng Chew, Deputy Chairman of Kuala Lumpur-listed Tan Chong Motor Holdings Bhd. Tan Heng Chew is a son of the late Mr Tan Yuet Foh, who co-founded the group with his brother Tan Kim Hor in 1957 when they won the Nissan distribution franchise. The group is named after their father, the late Mr Tan Chong.
A few years ago a family dispute ended up in court in which the Tan Kim Hor side, who held 45% of the private holding company which controls the group, Tan Chong Consolidated Bhd, petitioned the court to have it wound up. The Tan Yuet Foh side, with 55%, successfully opposed the case and it was struck out. Despite this, Tan Kim Hor remains Chairman of HK-listed Tan Chong International Ltd (0693) which owns the non-Malaysian motor business and is controlled by Tan Chong Consolidated Bhd. None of this has anything to do with Kwong Hing but we thought you'd enjoy the digression.
Going back to the Kwong Hing investigation, we still don't know who the fund manager in question is. Anyway, this incident provides an opportunity for us to tell you about some of the ways Kwong Hing has squandered shareholders' money in the past. Into the time machine we go...
IPO
Kwong Hing was engaged in the provision of fabric knitting, bleaching, dyeing and setting services when it went public. It was listed on 19-Mar-97, following an IPO sponsored by Standard Chartered Asia Ltd, of 45m shares at HK$1.20 each. Scrip-adjusted, that's about $1.93 in today's terms, so after six years, the stock, suspended at $1.61, is 17% below its IPO price. But it's been up and down more often than the lifts in Exchange Square since then.
A quarter of the offer was old shares sold by the controlling shareholder, while the company issued 33.75m new shares to raise $33.23m net of expenses, and the public ended up with 30%. So the controlling shareholder raised $13.5m before expenses. Not only that, but on 20-Feb-97, just 15 days before the prospectus was published, the group paid a special dividend of $30m to the controlling shareholder, an amount which is almost equivalent to the IPO proceeds. So you see that this company did not need to go public for funding reasons - it could have retained the special dividend instead.
Investment tip: this is a classic warning sign for investors - when you see an IPO where the controllers end up with large amounts of cash from share sales and/or pre-IPO dividends, ask yourselves why you should buy what they are selling. Sometimes there is a good reason, but often there is not.
First placing
On 25-Sep-97, only 6 days after the 6-month post-IPO lock-up period expired, Kwong Hing did the first of several placings under the general mandate, issuing the maximum-allowed 30m shares (equivalent to 20% of the existing shares) at $1.30 (scrip-adjusted, $2.091) per share and raising $38.41m net of expenses. The placing agent was South China Securities Ltd.
Strangely enough, given that the market was crashing at the time, the stock then took off, reaching a high in Sep-97 of $1.75 (scrip-adjusted $2.815) and in Oct-97 of $3.60 (scrip-adjusted $5.791). By comparison, the Hang Seng Index fell 29.4% in Oct-97.
First bonus issue
So Kwong Hing proposed a bonus issue of 2 new shares for every share held, which was approved at an SGM on 24-Nov-97. This is just as well, because the stock had already been trading ex-bonus since 14-Nov-97.
Regulatory note: we often wonder why the Stock Exchange allows trading to take go ex-entitlements before they have been approved by shareholders - it is a recipe for chaos if approval is not forthcoming and all the trades have been done on the wrong basis.
Second bonus issue and SFC investigation
The stock continued its nose-bleeding ascent, reaching a high in Mar-98 of $1.39 (scrip-adjusted $6.707).
On 27-Mar-98 Kwong Hing announced another bonus issue, this time 1 new share for each share held. Trading began ex-bonus on 16-Apr-98, but didn't last long. The stock closed the morning session up 28.7% at $0.74 (scrip-adjusted, $7.142) and was then suspended while the SFC launched an investigation into what was obviously a stock-ramping operation by persons unknown. No charges were ever brought.
The bonus issue was approved at an SGM on 24-Apr-98, but the shares went into the deep freeze for 6 months and did not begin trading again until 26-Oct-98, when Kwong Hing announced that the SFC had found that from 2-Mar-98 to 16-Apr-98, the public float of the shares appeared to be concentrated in the hands of seven traders who the SFC believed were both connected with each other and acting in unison. By the time of the suspension, the SFC estimated that 6 traders held 28.87% of Kwong Hing, leaving just 12.8% held by the rest of the public. The announcement pointed out that the p/e of the stock was now 34.9x.
The stock then crashed, reaching a low in Mar-99 of $0.077 (scrip-adjusted, $0.743), down 90% from its high.
Acumen
It wasn't long though before the price was ramped again, by persons unknown. On 21-Jun-99, Kwong Hing announced:
"the Company will still concentrate on its core textile business but because of Company's business acumen the Company would try to explore any opportunity which has good development potential within its ability, those might include the information provider business"
Investment tip: this is another classic warning sign to investors - when a management which has been successful in one area of commerce infers that it will be good at something completely unrelated, the inference is usually wrong.
Kwong Hing said they might invest HK$7.75m (US$1m) in such a business, or less than 5% of net assets. But then on 6-Jul-99 they said that they were negotiating to acquire a controlling interest in a private internet content provider, which could be a notifiable transaction (priced at over 15% of net assets). The next day, they gave a few more details, including the fact that the content provider was in the mainland, and said they were thinking about doing a placing of warrants. That week, the share price reached a high of $0.96 (split adjusted, $9.265) up 1147% in 4 months.
Nothing then happened until 20-Sep-99 when Kwong Hing said discussions had been terminated. The share price closed that week at $0.182 (scrip adjusted $1.757), down 81% from the high.
Three placings in 2 months
On 12-Nov-99, Kwong Hing, reacting to press articles, said it was considering a placing. On 16-Nov-99, it announced a placing of 90m shares at $0.17 (scrip adjusted, $1.641), raising $14.97m net of expenses, through Kingsway SW Securities Ltd (Kingsway Securities), the first of several transactions involving this firm. $10m was to be used for repayment of borrowings and the rest for general working capital.
On 6-Dec-99, Kwong Hing said it was in a very preliminary study to subscribe shares in a private telecommunication business. On 9-Dec-99, following another press report, it said it was considering "equity fund raising activities excluding rights issue".
A week later, on 13-Dec-99, Kwong Hing announced a placing of 118m shares at $0.172 (scrip adjusted, $1.660) again through Kingsway Securities, raising $19.80m net of expenses. The company said about half would be used for repayment of loans from financial institutions and the rest for working capital.
On 20-Dec-99 Kwong Hing said it had conditionally agreed to invest HK$30m in news shares representing 4.3% of Star Digitel Ltd (SDL). Prior to the proposed issue, SDL was 71% owned by Electric World Holdings Ltd, the major shareholder of which was Mr Wong Kam Fu, who had bought SDL from the company he formerly controlled, China Online (Bermuda) Ltd (0383). According to the announcement, SDL was the majority equity holder of several Sino-foreign joint ventures which leased equipment and provided consultancy services to various mobile-phone companies which operated networks named the Great Wall Networks in Beijing, Gansu, Guangdong, Hainan, Hebei, Shandong, Sichuan and Yunnan. Although they didn't mention it, the Chinese partner in these networks was an arm of the People's Liberation Army.
On 8-Jan-00, Kwong Hing announced its third placing in less than 2 months, again underwritten by Kingsway Securities, of 138m shares at $0.20 (scrip adjusted $1.93), raising $27m net of expenses. This time, they planned to use $11m on - shock horror - their core textile business! $5m would go to bank repayments and the rest to working capital.
On 27-Mar-00, the deal to subscribe 4.3% of SDL was terminated, partly because a winding-up petition against SDL had not been withdrawn. No payment had been made by Kwong Hing.
Kwong Hing and Victory Tech
Now the story gets really interesting. Remember, we are in the middle of the dotcom bubble. Textiles just doesn't cut it any more. So on 29-May-00, Kwong Hing announced that it had conditionally agreed to buy 15% of Victory Tech Investment Ltd (Victory Tech), a company with a couple of web sites which cannot be found today. One wholly-owned site was "Airlodge.com", a "one-stop on-line travel agent in Hong Kong and the Greater China region" and the other, 80%-owned site was the snappily named "Cult-ture.com", which was "a web-based music studio and an interactive realm for musicians, artists and music lovers". If you want to know what these sites looked like just before they were taken down, just for curiosity's sake, you can use the great web archive at www.archive.org.
Victory Tech was incorporated on 22-Sep-99 and was still wearing nappies. It had had no audited accounts, but for the first 6 months of its life to 31-Mar-00, it had unaudited losses of HK$685k and at that date had net assets of HK$1,315k. This implies the total investment to set it up was HK$2m.
For 15% of this unique trophy asset, Kwong Hing was willing to pay $33m, implying a valuation of $220m, or 110 times the initial investment 6 months earlier. This was to be satisfied by issuing 132m shares at $0.20 each.
The vendors of Victory Tech were Kingsway Electronic Services Ltd (Kingsway ESL) for 12%, and Ivan Wong Chi Keung (Mr Wong), for 3%, who prior to the deal, owned 80% and 20% of Victory Tech respectively. The announcement didn't say who owns Kingsway ESL, but the Kingsway name was not a coincidence, as you will see later.
If Mr Wong's name seems familiar, that's because he was featured in last week's story Cooking with Gas about how he sold an interest in another questionable transaction to Grand Field Group Holdings Ltd (0115).
On 4-Jul-00, the deal was revised so that Kwong Hing would initially buy just 7% of Victory Tech with an option to buy another 8% at the same price per share. The consideration for the first tranche was reduced pro rata, to $15.4m, satisfied by the issue of 77m shares. The first tranche was completed on 20-Jul-00, but the option was never exercised.
CIL and Victory Tech
Kwong Hing wasn't the only listed company to fall in love with Victory Tech. On 28-Aug-00, CIL Holdings Ltd (CIL, 0479), a debt-ridden company which by then was in prolonged breach of the Listing Rules for not publishing any accounts since those for 31-Dec-98, announced that it had still found time to engage in biting off two pieces of Victory Tech. It had bought "about 10%" on 5-Jun-00 for $25m payable by cash, in 3 instalments with the last due on 6-Jun-01.
In a second deal, it was now buying 9.96% for $24.9m, to be satisfied by issuing 249m CIL shares (7.37% of the enlarged CIL) at $0.10 per share (par value).
The Vendors in the second sale to CIL were HK Weaver Group Ltd (7.968%) and Mr Wong (1.992%). The ultimate parent of HK Weaver Group Ltd was Kingsway International Holdings Ltd, (Kingsway IHL, TSX:KIH) the Toronto-listed parent of Kingsway Securities. Presumably Kingsway IHL also controlled Kingsway ESL, the vendor to Kwong Hing. Kingsway IHL also has a HK-listed subsidiary, SW Kingsway Capital Holdings Ltd (0188).
As a result of these deals, CIL had a stake of 19.96% in Victory Tech, just below the 20% at which it would have to treat Victory Tech as an associate.
Investment tip: this is an old wheeze - if you are an acquiring company and stay below 20% of the investee company, then you can record the holding in your accounts as an "investment" (on the grounds that you have no significant control over the business) and only record any dividend income from the holding, rather than reporting your share of its losses, as an "associate".
CIL justified the price it paid based on a valuation by Chesterton Petty of $255m for Victory Tech as at 29-May-00. This valuer was involved in a number of other dotcom valuations, including two we have written about for proposed acquisitions by Yue Fung International Group Holding Ltd (Yue Fung, 0965) and Pacific Challenge (now New Times Group Holdings Ltd, 0166).
A Yue Fung connection?
Our story of 23-Nov-00 was about a deal by Yue Fung to buy 17.5% of an "online trading business" called Slough Technology Ltd based on a valuation of more than 1,000 times its start-up capital. Deep in that article, you'll see that a spokesman for Chesterton Petty said that their instructions to value the business had come from a Mr Ivan Wong. Could that be the same person as the Ivan Wong Chi Keung behind Victory Tech, or just a coincidence?
In perhaps another coincidence, on 24-Dec-02, Yue Fung replaced both its independent non-executive directors, and one of the replacements was a "Mr Wong Chi Keung". Both replacements joined the audit committee. Could that be the same person as Mr Ivan Wong Chi Keung, the person behind Victory Tech? Or could it be the same as the mystery "Ivan Wong" referred to by Chesterton Petty? Or just pure coincidence? The INED replacements took place a week after the ICAC raided Yue Fung and two related companies in a graft investigation. The "investigation into the company and a number of its directors" was confirmed by Yue Fung in an announcement dated 20-Dec-02.
Prompted by the ICAC investigation, on 28-Feb-03 Yue Fung said that on 7-Jan-03 it had set up an "independent committee" comprising both INEDs (including Wong Chi Keung) and an executive director "to furnish an independent report" on "a special review of the matters including but not limited to certain related party transactions". On 10-Apr-03 Yue Fung went into provisional liquidation. There has been no further news about the independent committee's independent report or the ICAC investigation.
Fairyoung and Victory Tech
Now back to the storyline. Remember we started by talking about Kwong Hing's stake in Victory Tech, and then got sidetracked into CIL's stake in the same company. But wait! Mr Wong and Kingsway were not yet finished selling bits of Victory Tech.
On 18-Sep-00 Fairyoung Holdings Ltd (Fairyoung, now Dynamic Global Holdings Ltd, 0231) announced that it would buy 2% of Victory Tech for HK$5m. Again, the vendors were HK Weaver Group Ltd (controlled by Kingsway IHL) and Mr Wong in the same ratio of 80:20. The deal was settled by the issue of 22,727,272 Fairyoung shares (1.68% of the enlarged company) at $0.22 each.
The Chairman and controlling shareholder of Fairyoung at the time was John Chan Boon Ning. On 23-Nov-00 he resigned to face criminal charges for stealing $81m from an associated company of Fairyoung and false accounting. He was convicted and on 19-Dec-01 he was jailed for 6 years.
Kwong Hing writes off Victory Tech
OK, this is becoming more than a light read, so let's get back to Kwong Hing, which you will recall, was buying 7% of Victory Tech from Kingsway ESL and Mr Wong for 77m Kwong Hing shares at $0.20 each, or $15.4m in total.
Close inspection of the Kwong Hing annual report for the year to 31-Mar-01 reveals that in fact, when the deal closed on 20-Jul-00, it was only booked at $0.12 per share, or $9.24m. All except $10k of this was written off in the same year.
China Medicine On-line
Another revelation in the Mar-01 annual report was that some time in the second half of the financial year, Kwong Hing had acquired 40% of a company called Global Network Holdings Ltd (GNH), which in turn owned 8% of another called China Medicine On-line Company Ltd (CMOL). So Kwong Hing had an effective interest of just 3.2% of CMOL. For this, they had paid $39.93m in cold hard cash, which implies that CMOL was worth about $1,248m! For Kwong Hing, the purchase was equivalent to 13.5% of the previous year's net assets, so it was below the 15% disclosure threshold and this was the first time we had heard about it. The lucky vendor was never disclosed.
The same year, Kwong Hing recorded a loss of $13.277m as "share of loss of an associate", due to the write-down of the stake in CMOL.
Investment tip: here you see an investment disguised as an associate. The rules say that you can report the "share of net assets of associate" but in fact, the associate only owns an investment in another company, so the associate's net assets are basically just the book value of the investment.
Kwong Hing offered no explanation in its report for what CMOL actually did for a living, or why Kwong Hing had invested in it, or who it had bought the stake from, or what the net assets of CMOL actually were.
In the accounts for the year to 31-Mar-02, Kwong Hing wrote off another $19.997m on CMOL. As a result, the 3.2% stake was carried forward at $6.656m, implying that CMOL was still worth HK$208m.
Note 25 of the accounts for the year to 31-Mar-03 reveals that Kwong Hing disposed of its interest in ATX Ltd, which owned the stakes in GNH and Victory Tech. Although the price on the deal was $7.7m, resulting in a gain of $1.029m, only $0.67m was in cash and the other $7.03m was in "other receivables", whatever that means. The purchaser was not identified, and we don't know whether the receivables have been collected.
Placing and Rights Issue
On 18-Nov-01 Kwong Hing announced another placing, again through Kingsway. This one was a bit different, because the controlling shareholders sold 181.1m shares and subscribed 322.2m shares both at $0.05 per share (scrip adjusted: $0.483), thereby maintaining their percentage stake in Kwong Hing by counter-acting the dilution.
Regulatory note: we've explained before in 1999 how the Listing Rules have a special pre-emptive right for controlling shareholders, but not for anyone else, who gets diluted by placings. 5 years later, this privilege is being scrapped, and with effect from 31-Mar-04, "top-up" placings will only allow the controller to subscribe as many new shares as it sells old shares in the placing. For little crumbs of regulatory reform we are grateful - better late than never.
The placing raised $16.11m net of expenses. But that, apparently, was not enough, so on 9-Jan-02 Kwong Hing announced a 1 for 1 rights issue at $0.04 per share (having already exhausted the placing mandate last time around). This time they raised $75m net of expenses. The rights issue was underwritten by Kingsway and was fully subscribed when it completed on 5-Mar-02.
Lactobacillus
Between 8-Nov-02 and 19-Nov-02 the share price jumped 106% to $0.105 (scrip adjusted $1.05), and this triggered an announcement by Kwong Hing on 19-Nov-02 that it was planning another investment. Oh no, what now? A week later, they announced details. By now the price had risen to $0.196 (scrip adjusted $1.96), up 284% in 18 days.
They proposed to buy a 9.8% stake in a company called Yakudo Group Holdings Ltd (Yakudo) for HK$39.975m, to be satisfied by the issue of 533m Kwong Hing shares (12.12% of the enlarged company) at $0.075 each to the vendor, Mr Lee Tao Kuang, "a businessman in Taiwan engaged in the production and sale of consumer products".. The implied valuation of Yakudo was HK$416.4m. Prior to the deal, the vendor owned 69.14% of Yakudo, while "independent third parties" held 30.86%. Yakudo had a 100% PRC subsidiary which was "engaged in the production, selling and distribution of lactobacillus drinks in the PRC".
Yakudo was only incorporated on 16-May-01 and by 30-Jun-02 it had notched up losses of $5.97m. The consolidated net asset value was $74.0m. So Kwong Hing was proposing to buy a 9.6% stake in a loss-making company, in a business that had no connection to textiles, and at 5.6x net asset value.
On 31-Dec-02, the deal was aborted. Thank heavens for small mercies. The share price had fallen back to $0.073 before the deal was scrapped, down 62.8% from the announcement of the deal terms. The lactobacillus episode leaves a nasty taste in investors' mouths.
If you cast your mind back to the beginning of this story, you will see a pattern emerging, of rapid price rises, followed by deal announcements, and then subsequent price collapses.
Consolidation
On 12-Feb-03 Kwong Hing announced a 10:1 consolidation of the shares, which became effective on 19-Mar-03
At last, a textile-related acquisition
On 29-Aug-03 Kwong Hing announced the acquisition of 70% of South Season Industrial Co Ltd (South Season) for HK$24.5m cash from Mr Chiu Ka Lun. Prior to the deal he owned 82% and the remaining 18% were held by an "independent third party". South Season was engaged in the "trading of garments in Hong Kong". The vendor warranted that it would have net tangible assets of $10m at completion, and the company recorded a profit of $9.646m in 2002, down 17% from a year earlier.
Although Kwong Hing is in the textile business, it is upstream, making knitted fabrics rather than garments. But at least there is some connection. Whether this deal represents a momentary return to core business after wasting money on dotcoms and flirting with phone networks and lactobacillus drinks remains to be seen.
Investors would be well advised to stay clear of such behaviour.
On 14-Jul-03 Arisaig Greater China Fund became a disclosed shareholder with 5.1% of Kwong Hing. This rose to 10.16% by 19-Sep-03. A spokesperson for Arisaig confirmed to Webb-site.com that the firm and its staff are not involved in the ICAC investigation.
© Webb-site.com, 2004
Organisations in this story
- Agritrade Resources Limited
- CIL HOLDINGS LIMITED
- Ping An Securities Group (Holdings) Limited
- Sunwah Kingsway Capital Holdings Limited
- YUE FUNG INTERNATIONAL GROUP HOLDING LIMITED
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