Observations on Next Digital (0282)
28 July 2021
This evening, Financial Secretary Paul Chan Mo Po (Mr Chan) has invoked his power under Section 841 of the Companies Ordinance to appoint a Financial Inspector (FI) to investigate the affairs of Next Digital Ltd (NDL, 0282). Let's just carefully make a number of points on this:
- There has been no such appointment in over 22 years since 22-Apr-1999, when the then Financial Secretary appointed an FI to investigate the collapse of Peregrine Investments Holdings Ltd.
- The use of this power, in respect of listed companies, has fallen into abeyance after 1-Apr-2003, when the stronger powers of the Securities and Futures Commission came into effect under the Securities and Futures Ordinance. Since then, it has been the SFC which investigates listed companies and frequently obtains disqualification orders against directors in the courts. The SFC can take cases of false or misleading disclosure to the Market Misconduct Tribunal (MMT) on a civil basis, or to the courts on a criminal basis (via the Department of Justice for the higher courts). They can also take non-disclosure to the MMT on a civil basis, resulting in fines and disqualifications.
- All that an FI can do is write a report after using powers to obtain evidence (including compulsory interviews). Pursuant to Section 862 of CO, the report is admissible as evidence in civil (but not criminal) proceedings, including disqualification proceedings. While the power to appoint an FI remains on the books, in our view there is no good reason to resurrect its use against listed companies or their directors, as this is something that the SFC already deals with. Indeed, the Government itself made this point on 9-Dec-2009 in response to a question by then-legislator (now ExCo member) Ronny Tong Ka Wah, following the CITIC Pacific Ltd (0267) debacle. An FI would only be appropriate for private companies which are beyond the SFC's purview. The SFC has tonight confirmed that it "has been making a series of formal enquiries" into NDL.
- Tonight's announcement mentions the delay in publication of NDL's results - that is a matter for the Stock Exchange, not the FS. The delay is unsurprising given that the NDL group's business was severely disrupted by the closure of Apple Daily HK (ADHK), which came after its offices were raided and several of ADHK's staff were arrested under the National Security Law. As the HK newspaper is no longer a going concern, accounting adjustments, including impairments, will need to be made. The online Taiwan Apple Daily continues.
- Memorably, after the arrests on 17-Jun-2021, then Secretary for Security John Lee Ka Chiu (now Chief Secretary) warned the public to cut all ties with the group. Is it any wonder then, that the group's HK bankers took that seriously, and reportedly refused to process inbound or outbound payments for companies in the group, such as payments from newsagents or for paper and ink? We have no reason to disbelieve the NDL earlier announcement of 26-May-2021 that it had sufficient working capital, but when the Government subsequently tells people to stop dealing with your business, that's a game-changer, indeed, game-over. If NDL had any cash outside of its ADHK subsidiary (at the parent level or in its Taiwan subsidiaries), it would not have been in the interests of NDL's shareholders or creditors to throw good money after bad by pumping it into ADHK.
- We note that in recent days, Mr Chan has been giving interview(s) on a range of topics beyond his normal purview, while neither confirming nor denying plans to run in the forthcoming Chief Executive "election". You have to understand that no potential candidate would want to start the clock on election expenses or trigger equal-time media rules by declaring an intention to run at this point, particularly if he/she is still in office and hasn't been given the go-ahead by Beijing. Similarly, Chief Executive Carrie Lam Cheng Yuet Ngor has also suddenly started being more media-accessible, even appearing on RTHK's English Backchat programme, although without the back-chat, as exceptionally, callers and direct listeners' questions were not allowed on that episode.
- In our view, tonight's announcement smacks of political grandstanding ahead of a possible "election contest" between Mr Chan and Mrs Lam. Whether they run, and the outcome, is of course a matter for Beijing, but the cost of appointing an FI is a matter for the public purse, and one that will likely duplicate the efforts of the SFC.
- Although we normally don't disclose shareholdings below the statutory 5% disclosure threshold, we'll make an exception now that the stock is suspended and tell you that Webb-site Founder David Webb sold his last shares in NDL in Aug-2019. At that point we judged that HK was going to tip towards authoritarianism (see "The most likely outcome for HK, 3-Sep-2019) and it would have been inconsistent with that view to expect ADHK to survive the crackdown.
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