Webb-site.com warns investors to avoid China Financial Industry Investment Fund Ltd (1227), a closed-end investment company trading at over 28 times its net asset value. We also find a surprising addition to the ranks of its independent directors.

Bubble warning: CFII (1227)
13 July 2007

China Financial Industry Investment Fund Ltd (CFII, 1227) is a closed-end investment company listed in 2002 without a track record under Chapter 21 of the Listing Rules. All such companies are exempt from the rule requiring a minimum amount of shares in public hands, or "free float", leaving their stocks more prone than others to manipulation. As investment companies, they are not allowed to invest more than 20% of their net assets in any one company (or related group of companies) and cannot own more than 30% of any other company or take management control of other companies.

We wrote about the earlier history of CFII in Mar-05.

As of 31-Dec-06, CFII was technically bust, with negative equity of HK$1.9m. On 10-May-07, it announced a placing of 12m new shares at $0.43 through Sun Hung Kai International Ltd (SHKI), raising $4.9m net of expenses.

On 16-May-07, two Independent Non-executive Directors resigned, both citing the need to spend more time on other things. The next day, Danny F. Wong (Danny Wong), through his BVI company Canossa Capital Ltd, acquired 12.372m shares, then 20.62% of CFII, at a reported $2.269 per share from Nelson Wong Kam Fu (Nelson Wong, no relation we know of) in an off-market transaction, for a total of $28m. Nelson Wong acquired the stake on 29-Jun-04 at $0.605 per share.

Danny Wong was once a director of SHKI, at least until 2004.

On 21-May-07 at the CFII AGM, Danny Wong apparently voted his newly-acquired stake against the re-election of the only remaining INED, Kelvin Tang King Fai, who survived by a vote of 58:42, but resigned the next day, again finding himself too busy with other things. Two new INEDs were appointed, leaving one seat left to fill to reach the mandatory three. One of the new INEDs, Mr Fung Kwok Leung, was an executive director of Forefront Group Ltd (0885) until 18-May-07. At the same time, Ms Yang Xiao Feng, Danny Wong's wife, was an INED of Forefront. That company deserves a Webb-site.com article of its own, but trust us, you don't want to own that stock either.

Danny Wong and his wife joined the board of CFII after the AGM on 21-May-07. On 29-May-07 he acquired another 8.806m shares off-market from Yim Sang (Mr Yim) at $0.38, or $3.35m in total. That took his stake to 29.41%, just below the takeover threshold. Mr Yim had subscribed for 10m shares on 21-Mar-05 at $0.188 per share. From 1990 to 1997 Mr Yim was an executive director of Star Telecom International Holding Ltd (now COL Capital Ltd, 0303), which Nelson Wong founded. It was floated by SHKI in 1991. The past association of the two men prompted an enquiry as to whether they were acting in concert to control CFII, which the company denied.

What's it worth?

On 1-Jun-07, CFII announced another placing of 12m shares at $0.60 per share, again through SHKI, raising $7m net. As of 30-Jun-07, the unaudited net asset value was $0.115 per share and there were 84m shares in issue, so that implies NAV of about $9.6m.

On 21-Jun-07, CFII announced a massive rights issue of 1,008m shares on the basis of 12 new shares for each existing share at $0.05 per share, to raise $48.4m net, advised and partly underwritten by SHKI. That would take the net asset value to $58m. Based on the enlarged capital of 1,092m shares, that's about $0.053 per share.

This stock has been trading at artificial prices far above its net asset value for a long time, but today it went to new levels. The stock went ex-rights today, which means if you buy now, then you won't be offered the new shares. It closed at $1.50 per share, which is more than 28 times the net asset value of $0.053. In developed markets, closed-end investment companies usually trade at a discount to net asset value.

The current share price values CFII, after the rights issue, at $1,638m, when its assets are worth only $58m, so 96% of it is hot air, unless you believe that the new management can somehow conjure up a 2700% net return from future investment decisions.

The new INED

Now, remember we mentioned that there was one INED seat left to fill? On 29-Jun-07 Legislator for Accounting Mandy Tam Heung Man was appointed as an INED. The biography in the announcement began "Ms. Tam, aged 50, is a Christian." How is this relevant, we wonder? She had better put in a prayer for shareholders of CFII.

© Webb-site.com, 2007

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