Webb-site Reports

Webb-site finds serious problems with CFC's statements about a GBP60m UK start-up joint venture with a BVI company, the owner of which is not disclosed, which has only partly paid for its share of the JV.

China First Capital (1269) and a questionable joint venture
7 October 2018

Scanning through announcements during a much wider and ongoing investigation, Webb-site came across a curious one by China First Capital Group Ltd (CFC, 1269), which on 15-Jun-2018 announced that it was entering into a 49:51 UK joint venture with a BVI company, Bonus First Holdings Ltd (BF), the owner of which was not disclosed.

The JV, KSI Education Ltd (KSIE), had not commenced business and had net assets of GBP1, with 1 issued share held by Yao Zhen (Ms Yao), about whom nothing was disclosed, save that she is an "Independent Third Party". CFC would issue 74.5m shares valued at HK$4.15 each (GBP29.4m in total) in exchange for 29.4m new shares (49%) of KSIE, while BF would subscribe GBP30.6m in cash for 30.6m shares (51%). So that's a hefty GBP60m start-up in the UK education sector - although it's not clear what KSIE would do with the CFC shares to monetize them.

The announcement stated:

"Completion of the Investment Agreement shall take place after all the conditions precedent to the Completion are fulfilled and on the date when the total consideration payable by [CFC] and [BF] is satisfied." (our bold)

On 6-Jul-2018, CFC announced that Completion took place that day and the new CFC shares had been issued to KSIE.

BF only partly paid for its shares in KSIE

Unlike opaque HK, the UK companies registry has no paywall and documents are freely available online. So we checked and found serious problems with CFC's statement. In a Return of Allotment of Shares filed on 6-Aug-2018 (one month after Completion), KSIE states "No shares allotted other than for cash". That's false because shares were allotted in exchange for new CFC shares. More importantly, the 30.6m KIE shares allotted to BF were only paid partly paid, at GBP0.5229 per share, with GBP0.4771 per share (of par value GBP1) unpaid. So BF only put in GBP16m, leaving a GBP14.6m shortfall.

Page 2 of the filing states: "Every share has full rights in the company with respect to voting, dividends and distributions". However, this is in conflict with Article 21 of KIE's Articles of Association, titled "All shares to be fully paid up", which states:

"No share is to be issued for less than the aggregate of its nominal value and any premium to be paid to the company in consideration for its issue".

So it appears that the issue of part-paid shares to BF was invalid under the Articles of Association of KIE, and at most, the GB16m paid should be regarded as a deposit for the future issue of shares. But if those shares were not legally issued, then they don't count and CFC owns almost 100% (save 1 share) of KIE, so it has just issued shares to its own subsidiary.

So the "total consideration payable" by Bonus First on Completion had not in fact been satisfied as CFC claimed. BF has only put up 26.7% of the GBP60m target capital, but now has 51% of the voting rights in KIE (if the share issue was valid). CFC injected shares valued at GBP29.4m, but due to the cash shortfall, CFC's 49% share is worth only GBP22.25m unless and until BF pays up, leaving CFC with a GBP7.15m loss.

4, not 3, Directors of KSIE

The first announcement also stated:

"Upon Completion, the board of directors of [KSIE] shall comprise of three directors and each of [CFC], [BF] and Ms. Yao shall nominate one director to [KSIE]."

This wasn't true either. In fact, upon Completion, there were 4 directors. Ms Yao was appointed upon incorporation on 9-Oct-2017. Wilson Sea (Mr Sea) and Ms Li Dan (Ms Li) were appointed on 4-Jun-2018, 11 days before the JV was announced, and Sabrina Cheung Ting Wang (Ms Cheung) was appointed on 11-Jun-2018, 4 days before the JV was announced. So even at the announcement stage, there were 4 directors. Mr Sea is Chairman of CFC and Ms Li is an ED of CFC. So, you must be wondering, who represents BF, if anyone? We thought it might be Ms Cheung, but she has been described in a CFC press release on 30-Aug-2016 as "partner of First Capital Fund", next to "Jeff Zhang, President of First Capital Fund Management Ltd", which is a 100% subsidiary of CFC. So it seems that CFC has 3 of the 4 directors on the board.

On 11-Jun-2018, 4 days before the JV was announced, the Articles of Association of KIE were amended to stipulate that as long as Ms Cheung remains a director, she will be Chairman; that the Chairman has a casting vote on board resolutions; and that her appointment can only be terminated by a special resolution (75% vote) of shareholders, giving CFC (with 49% of the voting rights) a veto on her removal.

All of this begs the question of whether KIE is in practice a subsidiary of CFC, either because it has majority representation on the board or because the part-paid share issue to BF was invalid.

About BF

We still don't know who owns BF, and other than Ms Yao, there has been no UK filing regarding "Persons with Significant Control" of KSIE, which is required at the 25% level. However, we note that BF was a "cornerstone investor" in the prospectus dated 30-Jun-2018 of Kinergy Corporation Ltd (3302), and that CFC's 100% subsidiary, First Capital Securities Ltd, was a "Joint Bookrunner and Joint Lead Manager" in the IPO. The prospectus failed to state who owned BF.

Ms Yao owns two more UK KSI companies

Finally, we note that on 22-May-2018, Ms Yao incorporated two more UK companies as their sole director and sole shareholder. They are KSI EDU LTD and KSI GLOBAL LTD. We don't know what she plans to do with those, nor why KSIE is not their initial shareholder, given that it was incorporated first.

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China First Capital (1269) and a questionable joint venture 7 October 2018