In the first of two stories, we peel away the layers of the onion that is Yanion, and we don't like what we find. You will see a series of questionable acquisitions at exorbitant prices, at least two of them involving the same "independent third party", followed by legal disputes, a disclaimed audit opinion, replacement of auditors, and massive write-offs.

Yanion's Rotten Onion
23 June 2003

In the first of a two-part story, we turn our spotlight on Yanion International Holdings Ltd (Yanion, 0082) originally a maker of VCD players and other audio-visual equipment., which has not made an annual profit since 1997. Then tomorrow, we'll tell you how this relates to a listed investment company which has sunk 58% of its net assets into Yanion group companies.

History

Electronics manufacturer Yanion has a colourful history. In 1996, its then Chairman and co-founder, Leung Wah Chai (Mr Leung), was found to be an Insider Dealer by the Insider Dealing Tribunal, along with his wife's sister who was found to be acting on his behalf. The charge related to insider selling between 8-Mar-93 and 12-May-93, ahead of the 1992 results, which showed a collapse in profits. Mr Leung had to pay a total of HK$6.7m including enquiry expenses of $3.5m and a penalty of $1.7m.

Mr Leung was also banned from directorship of listed companies for a year from 1-Dec-96. That wasn't much of a problem because his wife (who is a co-founder and General Manager) took over the Chairmanship from 28-Nov-96 to 2-Dec-97 when he resumed the role. Today he remains an executive director.

Famous friends

Another famous director was Makie Hui Po Yuen (Mr Hui), an Independent Non-executive Director who resigned on 2-Apr-96 to pursue other interests, namely that he was having a spot of bother with his own listed company, Yeebo (International Holdings) Ltd (Yeebo, 0259), maker of LCD displays and printed circuit boards.

Mr Hui was the Chairman and Founder of Yeebo and resigned on 27-Mar-96 to fight a writ from Yeebo which was eventually followed by criminal charges. In Aug-00 he was convicted of embezzling HK$80m (out of charges totalling $100m) involving 23 charges of theft, four charges of false accounting and two of publishing a false statement (namely, in the Mar-94 and Mar-95 accounts of Yeebo). He was sentenced to 7 years in jail.

For more on that, see our archive story on Yeebo, Criminal Record.

Dazheng WorldVest JV

On 12-Jun-00, Yanion announced the acquisition of 10% of Global Cyber Ltd (Global Cyber) for HK$80m in cash. Global Cyber was a BVI company which in turn owned 80% of Shanghai Dazheng Worldvest Technology Co Ltd (Dazheng WorldVest). The remaining 20% was owned by Shanghai Dazheng Group Co Ltd (Shanghai Dazheng), a private company in the PRC.

The principal activities of Dazheng WorldVest were the research, development and installation of a video-on-demand (VOD) system in the PRC, involving a technology "developed and owned by" Shanghai Dazheng. The technology was contributed by way of an exclusive licence in return for the 20% stake in Dazheng WorldVest.

Vendor

The vendor was Majestic Star Holdings Ltd (Majestic Star), a BVI company, which owned 98.6% of Global Cyber prior to the sale. The guarantor of Majestic Star was its "single largest shareholder", Mr Ho Wai Kong (Mr Ho). We know nothing else about him. If you know, tell us.

The remaining 1.4% of Global Cyber was owned by two unnamed listed companies in Singapore and Hong Kong -  If you know who they are, tell us. The price of $80m was funded by a placing of 90m new shares representing 47.18% of the enlarged issued share capital at $0.90 each through Dao Heng Securities Ltd (Dao Heng).

Valuation report

The shareholder circular dated 7-Jul-00 included a valuation by Sallmanns (Far East) Ltd (Sallmanns) of Global Cyber at RMB881m (HK$823m). The Sallmanns report referred to a joint venture contract to establish Dazheng WorldVest dated 16-Dec-99. You will not be surprised to learn that despite the valuation, Global Cyber had only received a net investment of HK$7.8m, half of which had already been lost in start-up expenses, leaving net assets at 31-May-00 of $4.0m. So the company was being valued at over 200 times book value. No turnover had been recorded.

Sallmanns wrote that the Dazheng VOD technology was developed in 1996 by Shanghai Dazheng in Silicon Valley, USA. By 31-May-00, Dazheng WorldVest had signed "co-operative agreements" with Taizhou Cable Company, Jiangyin Cable Company and Bautou Cable Company to provide the technology via their channels and was in negotiation with a number of others. Sallmanns' report was signed by then Managing Director Brett Shadbolt, who has since moved on to head another valuation firm, Censere (Far East) Ltd.

Accountants' report

The accountants' report by Deloitte Touche Tohmatsu showed that Dazheng WorldVest was registered in the PRC on 21-Feb-00 (just 4 months before the Yanion deal).

The report showed that Global Cyber group had paid a management fee of HK$600,000, at the rate of $200,000 per month, and a consultancy fee of $2m, to Asiavest Capital Ltd (Asiavest Capital) of which Mr Fred Wu Fong (Mr Wu) and Mr Tom Guo Duen-how (Mr Guo) were directors and shareholders. Both Mr Wu and Mr Guo were directors of Global Cyber.

The acquisition was completed in early August 2000.

Board changes

On 29-Nov-00 there was a changing of the guard at Yanion, as 4 executive directors and one INED resigned, and Mr John Kao Ying-lun (Mr Kao), Mr Cheng Shu-wing (Mr Cheng), Mr Wu and Mr Guo were appointed as executive directors, while Mr Charles Chan Wai-dune (Mr Chan) was appointed as an independent non-executive director (INED).

Mr Kao sits on the Asian Advisory Board of the Richard Ivey School of Business of the University of Western Ontario, from which he graduated. The school describes him as a director and "founding partner" of WorldVest Holdings Ltd (WorldVest), an "investment banking firm, which is involved in providing services to businesses that are about to go public".

What the Ivey site doesn't mention is that in 1998 Mr Kao had his license as an investment adviser suspended for 4 months by the Securities and Futures Appeals Tribunal after a client of his now-defunct firm Goldwyn Capital Ltd in 1995 failed to follow through on a takeover bid for Tungtex (Holdings) Co Ltd (0518).

INED Mr Chan is the managing partner of Charles Chan, Ip & Fung CPA Ltd (CCIF), an accountancy with clients such as Riverhill Holdings Ltd and Inworld Group Ltd who have featured on Webb-site.com before.

On its web site, under "business associates", CCIF lists two "local connections", one of which is Mr Kao's WorldVest Holdings Ltd (WorldVest), which shares an office with SFC-licensed WorldVest Capital Ltd (WorldVest Capital), whose Responsible Officers are Mr Cheng and Mr Wu. According to the 2000 annual report of Yanion, WorldVest Capital received a consultancy fee of HK$900k that year, and Mr Cheng, Mr Wu and Mr Guo are also directors of WorldVest Capital.

As a result of the 29-Nov-00 reshuffle, 4 out of 7 executive directors of Yanion were linked to WorldVest, and given the "local connection" between CCIF and WorldVest, one out of two INEDs (Mr Chan) can be linked to WorldVest. In effect, there had been a change of board control.

The other "local connection" of CCIF is law firm Siao, Wen and Leung (SWL), which has also been listed in the annual reports of Yanion as its legal advisor since the report for 2000, replacing Iu, Lai & Li (ILL). Carson Wen, then a partner of SWL, was appointed as an INED of Yanion on 22-Jan-01, replacing Brian Tsang Link Carl, a partner of ILL.

Regulatory note: Webb-site.com believes that legal advisors to a company should not be allowed to serve as independent directors, as they are hardly likely to oppose a transaction in the boardroom if their law firm stands to get fees out of the deal. Currently, Listing Rule 3.11(2) specifically allows a company's "professional adviser", including lawyer, to act as an independent director. By contrast, in the mainland markets, this practice is banned (see Para IIIA5 of the CSRC Guidelines). In this respect, the mainland is already ahead of HK.

2nd placing

On 6-Dec-00, a week after the change of board control, Yanion announced another placing, again through Dao Heng, this time of 38m new shares at $0.65 each, representing 19.92% of the existing issued shares, almost the maximum allowed under the general mandate granted on 24-Jul-00. The net proceeds of $24.3m were for "general working capital".

3rd placing

On 7-Feb-01, Yanion announced a third placing, again through Dao Heng, for 45.6m new shares at $0.68 each, representing 19.93% of the existing issued shares, blowing a mandate granted 8 days earlier. The net proceeds of $30.6m were for "general working capital".

The annual report for the year ended 31-Dec-00 revealed in note 28(e) that on 21-Feb-01, Yanion agreed to acquire Kongnet Group Ltd (Kongnet), a BVI company which owned 90% of a Sino-foreign enterprise engaged in the "Internet phone business" in the PRC for $35m in cash.

It was not until the 2001 annual accounts, signed on 12-Aug-02, that the details showed up. It turned out that the enterprise was called "Tianjin Weikang Communication Co Ltd" and when Kongnet was acquired, it had net tangible assets of just $1.065m, so Yanion paid 32.9 times book value. The vendor was not named. We wonder who it was.

Share options

On 30-Jan-01, a new option scheme was introduced to replace the one adopted on 30-Sep-91. The new scheme allowed the grant of options over up to 10% of the issued shares and would last for 10 years. Well, it would for some companies. A week later, on 6-Feb-01, Yanion granted 22.8m share options (equivalent to 9.97% of the issued shares) exercisable for 1 year from 26-Feb-01 at $0.61 per share, compared with the market price of $0.73. The scheme was 1 week old and already maxed out. Of these options, 17.1m went to directors, of which 13.9m went to the WorldVest-related directors. The grantees wasted no time in exercising them, with 19.1m being exercised on 26-Feb-01 (the first possible day), 1m on 2-Mar-01 and the remaining 2.7m on 7-Mar-01.

4th placing

On 12-Mar-01, it was time for another placing through Dao Heng, for up to 200m new shares at $1.25 each on a best efforts basis. This one represented 67.3% of issued share capital, and so required a Special General Meeting to approve it. This time, there was some purpose; of the net proceeds, $180m would be used for business expansion, and the other $67m for "general working capital". They wrote:

"The Company has identified certain investment opportunities including further investments in video-on-demand technology and re-engineering of cable T.V. stations, acquisition of bio-tech projects and business expansion of Internet phone."

No deals had been struck, but due diligence was underway on certain of these projects. In the end, on 25-May-01 it was announced that only 137.6m of the shares had been placed, raising net proceeds of $170.1m.

Acquires another 4% of Global Cyber...

On 29-Mar-01, Yanion agreed to buy another 40,000 shares (4%) of Global Cyber from Majestic Star for HK$40m in cash (50% on signing, 50% on completion), taking its stake to 14%. So the implied valuation had risen from $800m to $1bn in 9 months. The price was "with reference to a recent market transaction in relation to Global Cyber".

The transaction they were referring to was probably the purchase by Tem Fat Hing Fung (Holdings) Ltd (TFHF, 0661) from Majestic Star of 38,000 shares (3.8%) of Global Cyber for $38m, announced on 15-Mar-01. Incidentally, Mr Alexander Chan Fat Leung, who was then Managing Director of TFHF, is on the same Asian Advisory Board of the Richard Ivey School of Business as Mr Kao of WorldVest and Yanion. What a small world.

The deal by TFHF was supported by a "preliminary valuation" by American Appraisal Hongkong Ltd at 28-Feb-01 of RMB1.15bn (HK$1.07bn). The final valuation was unchanged. Earlier, the deal had been the subject of an MoU as announced on 8-Jan-01, when TFHF had contemplated buying 20% to 35% of Global Cyber.

It was now disclosed that Mr Ho owned 67% of Majestic Star, and there was no word on who owned the rest. If you know, tell us. The financial situation of Global Cyber was little changed, with a net deficit at 31-Dec-00 of $1.8m and a cumulative loss of $9.4m.

In its annual report for the year to 30-Apr-02, TFHF wrote off the entire investment in Global Cyber.

INED quits

On 13-Jun-01, Carson Wen resigned as an INED of Yanion and was replaced by Mr Choy Tak Ho.

...and another 13%

You can never have to much of a good thing! On 18-Jul-01, Yanion agreed to acquire another 13% of Global Cyber for HK$130m in cash, taking its holding to 27% at an accumulated cost of $250m.

Of the 13% stake, 10% of Global Cyber was acquired from Majestic Star, and 3% from a company owned by Mr Xu Nai Feng (Mr Xu), a director of Shanghai Dazheng. Before this deal, Mr Xu owned 41.60% of Global Cyber, which he had apparently acquired from Majestic Star since the last deal in Mar-01, leaving Majestic Star with 39.24%. We don't know what he paid for the stake.

Of the consideration, a deposit of $45m was paid on 1-Jun-01 (when an MoU was signed) and $20m when the agreement was signed on 18-Jul-01, with the balance on completion. Both of the deposits were paid to Majestic Star, not Mr Xu.

In summary then, Yanion had paid a total of $250m to Majestic Star (controlled by Mr Ho) and Mr Xu for 27% of a company which had negative net assets of $1.8m.

5th placing

On 23-Aug-01, Yanion agreed to place through Dao Heng 86m new shares at $1.26 per share, representing 19.8% of the existing issued shares and so once again blowing the general mandate granted at the AGM on 25-May-01, raising $107.3m after expenses. The placing was completed on 10-Sep-01.

Interim Results

Yanion's interim results announcement on 24-Sep-01 stated:

"Up to now Dazheng WorldVest had entered into re-engineering contracts with five cable TV stations, covering over 1,000,000 cable TV  subscribers."

Investment in Korning

On 2-Jan-02, Yanion conditionally agreed to acquire Korning Investments Ltd (Korning), a BVI company, for US$12.8m (HK$99.84m) from Mr Brian Chen Wen-Suei (Mr Chen).

Korning's only asset was another BVI company, which in turn owned nothing, but proposed to enter into a 60:40 joint venture with a then un-named PRC party "engaged in the manufacturing and sale of pharmaceuticals in the PRC" and it was proposed that the JV would be engaged in the same industry.

It was a condition of the acquisition that a JV agreement be entered into with a planned capital of RMB40m, so Yanion would invest RMB24m (HK$22.4m) in cash, while the PRC party would invest RMB16m in tangible and intangible assets including exclusive rights to certain medicines..

As you can see then, Mr Chen was in effect being paid a finder's fee of $99.84m, or more than 400% of the amount that would be invested in the venture. Why did Yanion find it commercially justifiable to pay such a massive commission for the investment? We do not know. You'll find out a little more about Mr Chen in our next article.

On 12-Apr-02, Yanion announced that the JV agreement had been signed with a subsidiary of "Chinese National Group of Traditional and Herbal Medicine", later named as "Huahe Pharmaceutical Co Ltd". Yanion also said that it was now only going to buy 87% of Korning rather than 100%, but it would still pay the same US$12.8m for the privilege of being able to invest in an effective 52.2% in the JV, excluding the investment cost itself.

Not only that, but the registered capital of the JV had been increased from RMB40m to RMB126m, so Yanion would have to find RMB65.8m (HK$61.8m) to invest in the venture. That still leaves Mr Chen's commission at 162% of the investment.

The JV, eventually named Huayi Pharmaceutical Co Ltd (Huayi), would have "all intellectual properties of 16 medicines". Where Western doctors have failed for centuries, Yanion said that the JV would have a medicine "for curing lung cancer". Imagine what the Western tobacco companies would pay to eradicate lung cancer and sell their cigarettes without any health warning. Still, it seems that nobody at the Stock Exchange who vetted the announcement thought that this claim might be just a teensy weensy bit exaggerated. "Treating", maybe, "curing", not.

Of the 16 medicines, 4 would be injected by way of capital contribution to the JV, but the other 12 would be acquired by the JV from the PRC party for RMB15m in cash.

The announcement also said that the remaining 13% of Korning would be acquired by "an investment company not connected with the directors, chief executives or substantial shareholders of the Group or its associates". We'll tell you who that is in our next instalment.

It was also agreed that the PRC Party would:

"use its best efforts and experience in the pharmaceutical business to help the PRC JV to achieve a profit target of RMB50 million in the first year of its establishment".

The circular for the acquisition was dated 3-May-02 and the deal was completed on 9-Aug-02.

Breach of Listing Agreement

Next came an announcement on 25-Apr-02 that Yanion would be late publishing its audited 2001 results, a breach of the Listing Agreement for which the Stock Exchange has not taken any public action.

6th placing

On 24-May-02, with the 2001 results still not published, Yanion agreed to place through Dao Heng up to 68m new shares on a best efforts basis at $1.40 per share, representing 13.1% of the existing issued shares. By completion on 12-Jun-02, only 50.9m shares were subscribed, representing 9.8% of existing issued shares and raising net proceeds of $69.4m, of which $62.6m would be used to finance the capital contribution to Korning's JV.

2001 Annual Report

On 27-Jun-02 the results announcement was again delayed, continuing the breach of the Listing Agreement, and this was repeated on 31-Jul-02. The results were finally announced on 12-Aug-02.

When the annual report finally came out, it made for what forensic accountants would call fascinating reading.

Kongnet

The 2001 report said that Kongnet and its subsidiary had "no material transactions" since the date of their acquisitions up to 31-Dec-01. You may recall that Kongnet cost Yanion $35m cash, of which $33.9m was goodwill. Yanion wrote off $26.7m of that goodwill in 2001.

Dazheng WorldVest

The accounts state that in Oct-01, the directors of Global Cyber and Yanion "became aware" that Shanghai Dazheng had applied for a patent on a VOD chip in its own name, which was believed to infringe the intellectual property it had injected into the Dazheng WorldVest joint venture. As a result of the dispute:

"the books and records in respect of Shanghai Dazheng have not been made available for examination by the directors of Global Cyber".

This meant that Yanion recorded the 27% investment in Global Cyber at cost of HK$250m rather than equity-accounting for it based on the underlying business (if any) of Dazheng WorldVest. It is beyond our comprehension how Global Cyber could own 80% of the joint venture and yet have no access to its financial records. What kind of control did they have? Did they not appoint a majority of the board of Dazheng WorldVest?

The board of Yanion wrote:

"The Group has appointed its PRC lawyer to deal with this matter and may take legal proceedings in the PRC to protect the investment interests of the Group..."

But just to underline why they were not making any provision for the investment:

"The development potential of this investment is huge and the Group has been approached by various interested parties aiming at increasing the commercial value of the investment which the Group would benefit if the abovementioned dispute could be resolved by non-legal means."

Yeah, right. Elvis is alive and well and writing annual reports.

Note 16 stated that when Yanion agreed on 29-Mar-01 to acquire the 4% interest in Global Cyber from Majestic Star:

"one of the executive directors of [Yanion] was also a director of Majestic Star...On 31 March 2001, the executive director of [Yanion] ceased to be a director of Majestic Star, but remained a signing officer thereof."

The Yanion executive director in question was never named. Who was it, we wonder, and how come he was a director of Majestic Star? We are asked to believe that Majestic Star was an independent third party, but as you will see next, Yanion seems to find most of its acquisitions through them.

Korning linked with Global Cyber

Note 18 of the accounts reveals that under a loan agreement dated 18-Sep-01 with Korning:

"a HK$90m payment (the "Korning Deposit") was made to an independent third party via Majestic Star, under the instruction of the vendor of Korning...The Korning Deposit was interest free, unsecured and repayable within six months...if the Korning Vendor proved to be unable to secure the pharmaceutical joint venture...The repayment date was subsequently extended to 15 August 2002..."

This was the first time that Majestic Star, the vendor of Global Cyber, was linked with the Korning deal. Amazingly, this connection, plus the fact that the $90m was already paid as a "loan", had not been mentioned in the announcements of the Korning deal on 2-Jan-02 and 12-Apr-02 or the shareholder circular dated 3-May-02. Now look at that payment date: 18-Sep-01, more than 3 months before the Korning deal was first announced, but just 8 days after the 5th placing was completed, raising $107.3m. The omission of such a material fact from the announcements and circular cries out for regulatory intervention.

The auditors wrote:

"Due to the lack of documentary evidence surrounding the advance [of the $90m] we have not been able to satisfy ourselves as to the use thereof and therefore, its eventual and proper inclusion as part of the cost of the Pharmaceutical JV."

Modern Vocal

The accounts also revealed that on 29-Oct-01, Yanion had agreed with Modern Capital Overseas Ltd, an "independent third party" to lend $11.5m to "the vendor of Modern Vocal Ltd", who was not named (we wonder who), on an unsecured basis at 5% p.a.. On 19-Dec-01, Yanion agreed to buy 60% of Modern Vocal Ltd from the still un-named vendor, for $13.5m, offsetting the loan and finally completing the acquisition on 22-Mar-02. This was described as an addition to the internet phone business of Yanion established when it acquired Kongnet.

In the 2002 annual report it turned out that Modern Vocal owns 90% of Tianjin Jitong Network Technology Co Ltd.

Balance sheet

The 27% of Global Cyber ($250m) and the deposits paid for acquisitions of Korning ($90m) and Modern Vocal ($11.5m) together amounted to $351.5m, or 83% of Yanion's net tangible assets at 31-Dec-01.

Auditors Ernst & Young disclaimed their opinion and did not seek reappointment at the AGM.

2002 Annual Report

In the 2002 annual report, Yanion said that the business of Dazheng WorldVest was "temporarily suspended" and that the legal dispute continued. So they wrote off the entire $250m investment.

They Internet Phone business of Kongnet and Modern Vocal recorded zero revenue and a loss before interest and tax of $20.99m.

The Chinese medicine business in Huayi recorded revenue for 5 months of HK$24.25m and a segment profit before tax and interest of $8.13m after depreciation and amortisation of $5.82m. This will leave some work to do if they are to reach the stated goal in the JV agreement of RMB50m (HK$47m) of profits in the first 12 months of the venture.

Note 35(a) of the report states that:

"the approval process for the joint venture by varies (sic) ministries and authorities and the setting up of the business took an extended period of time far exceeding what the parties had originally anticipated. Commitment to fully capitalise Huayi has now been extended to 26-Jul-03"

At the year end, Yanion had contributed just HK$20m of the $63m capital contribution to Huayi.

New auditors Horwath Hong Kong CPA Ltd said they "were not able to review the audit files [of Ernst & Young] for the year ended 31 December 2001" and had not been able to carry out alternative audit procedures covering 2001, so qualified their opinion as they were unable to determine whether the opening balances at 1-Jan-02 were free from errors or misstatement.

At 31-Dec-02, Yanion held $23.415m in "participating redeemable preference shares in a fund". The fund was not identified.

Another listed company

Tomorrow, we'll tell you how another recently listed company, supposedly independent of this situation, chose to sink the bulk of its net assets into shares of Yanion, Korning and Modern Vocal, and we'll also show you the connections between the two stories.

© Webb-site.com, 2003


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