The UURG to Purge
25 September 2009
With purported feng shui man Tony "my will is genuine" Chan Chun Chuen (Tony Chan) in the news recently, our attention was drawn to one of the listed companies with which he is involved, UURG Corp Ltd (UURG, 8192).
UURG started out as a tiny little IT company then known as "AGL MediaTech Holdings Ltd", listing on Hong Kong's junior board, GEM, on 29-Nov-02 at a split-adjusted $0.10 per share (note: we adjust all UURG shares and prices in this article for share splits). One third of the issue was old shares sold by the founders. The company raised HK$20m gross ($14.6m net). 93% of the initial placing went to 25 investors. The prospectus claimed UURG to be an "on-line rich media and content distribution solution provider" with proprietary "content distribution technology". The co-founders were Leonard Chan Tik Yuen (T Y Chan) and his dad, Chan Ngan Hoi (N H Chan). A large chunk of the pre-IPO turnover was with related companies - a flimsier track record you could not hope to find.
History was repeating itself. N H Chan founded a company then called Capital Automation Holdings Ltd (CA), a maker of computer-aided design systems for the textile and garment industries, which listed on 15-Apr-92 in a tiny $39.25m ($34.25m net) offering. The prospectus of 31-Mar-92 was the same day as the year-end, and CA made a record net profit of $20.25m for that pre-IPO year. It was all down-hill from there. Within a year of listing, the company had started diversifying into property development in Zhejiang.
T Y Chan joined his father's board on 1-Sep-99 and took over as Chairman on leap-day 2000 at the tender age of 26. On 28-Jul-00, after CA had racked up 6 years of losses, Rocard, controlled by N H Chan, sold 50m shares (31.8%) of CA to ex-jailbird Chim Pui Chung for HK$56m. N H Chan resigned on 29-Sep-00 and T Y Chan resigned on 7-Dec-00. Control later changed again, and CA became GOME Electrical Appliances Holding Ltd (0493) in a backdoor listing. We will save that story for another day.
First change of control
After listing, the stock was ramped by persons unknown, reaching a high of $0.424 (up 324% from IPO) in March 2003, prompting a concentration warning that on 12-Mar-03, 10 shareholders owned 82.3% of the public float. On 2-Apr-03, it admitted that the prospectus had overstated the expected proceeds of the IPO and hence the net asset value. On 24-Sep-03, it admitted that the controlling shareholder had not fully paid its due share of the listing costs, and hence UURG's results for the year to 31-Mar-03 were wrong.
On 2-Dec-03, T Y Chan's mum, Wong Cheung Yun, resigned as NED, and 2 INEDs resigned, while Francis Chan Ping Kuen was appointed INED. With so many movements in one day, change could not be far away.
On 10-Dec-03, Chu Yen Ling (Mr Chu) agreed to buy 55% of UURG from the family trust of T Y Chan for $10.56m, triggering a general offer at $0.016. The trust sold its remaining 20% stake in a placing via Kingston Securities at the same price, which was a 90% discount to the market price at the time, indicating how unrealistic the market price was, because the offer was still a 135% premium to net asset value. On 12-Jan-04, the offer document was posted and Mr Chu joined the board as Chairman. He was then 68 with a 26-year-old business in paper importing for his firm Mitsa (HK) Ltd and no experience in the IT sector.
Placings and consolidation
UURG was burning cash and had to do two rounds of placings to keep paying the bills.
On 27-Oct-04 UURG agreed to use the full 20% general mandate to issue 240m shares to 2 subscribers, Mr Niu Tiehang (Mr Niu) and Ms Liu Peng (Ms Liu), social acquaintances of one of the directors, in equal amounts at $0.0256, raising $6m net.
On 10-Feb-06, UURG agreed to use the full 20% general mandate to issue 288m shares at $0.0066 of which Ms Liu took 139.2m shares and Ms Siu Yuk Chu (Ms Siu) took 148.8m shares (increasing her stake to 172.8m shares), raising $1.85m net for working capital. Ms Liu had a 15% stake after this, and Ms Siu had a 10% stake.
On 28-Apr-06 UURG consolidated its shares 8 to 1.
The stock closed 2006 at $0.00785. That year UURG booked a loss of HK$1.4m on turnover of $2.8m and ended with equity of just $0.83m.
Second change of control - Wilson Pong
On 10-May-07, UURG announced an approach which might lead to a change in control. None of the subscribers in the placings in 2004 and 2006 had sold any shares at this point. On 8-Jun-07 UURG put out a concentration warning that on 11-May-07, 92.57% of the company was held by 16 shareholders.
On 3-Jul-07, UURG announced that Wilson Pong Wai San (Mr Pong) would buy all Mr Chu's 660m shares in UURG (unchanged since he bought it) for $13.2m or $0.02 per share, triggering another general offer. This was a 48.1% discount to the market price. However, simultaneously, UURG agreed to issue 2,540m shares to Mr Pong at a much lower $0.0005 each for $1.27m and $4m of bonds convertible at $0.0005 per share (or if the zeroes boggle your mind, 2000 shares per $1). So Mr Pong's total entry price was $18.47m.
The purchase from Mr Chu was completed on 5-Jul-07. The share subscription and the bond issue were approved by shareholders (excluding Mr Pong) on 17-Aug-07 and completed on 4-Sep-07. Our CCASS Analysis service shows that the subscription shares were probably deposited into HSBC on 17-Oct-07 (that's 127m shares pre-split). The general offer closed without acceptances on 19-Sep-07, and as is traditional in Hong Kong, all the independent directors (who were supposed to be independent of the outgoing controlling shareholder) resigned and were replaced with 3 new ones.
On 3-Sep-07 Ms Liu sold most of her shares (243.52m) off-market at $0.09, which was the market price. We can't track what happened to the other subscribers, Mr Niu and Ms Siu, as they both made filings (Mr Niu, Ms Siu) stating that their holdings had been diluted on 5-Jul-07 by the subscription of Mr Pong. The notices were both filed late, on 18-Oct-07, and they were wrong, because the dilution did not occur until 4-Sep-07 when the subscription completed. If they were independent of each other then it is puzzling that their late filings were simultaneous.
We note that there were deposits into CCASS of 8.64m shares (pre-split) on 7-Nov-07 and 6m shares (pre-split) on 21-Nov-07, which are the same size as the holdings of Ms Siu and Mr Niu and were deposited with Sanfull Securities Ltd (Sanfull) and Cheong Lee Securities Ltd (Cheong Lee) respectively.
On 21-Dec-07 the shares were split 20 for 1.
On 17-Jan-08, Mr Pong sold 312m shares in 3 blocks (12m, 100m and 200m) of which 300m shares were off-market, for total proceeds of $66.80m gross, or an average of about $0.2149 per share. We don't know who bought them, but 100m shares arrived in the CCASS account of Cheong Lee on 18-Jan-08 from outside CCASS.
On 25-Jan-08, Mr Pong converted $0.6m of his bonds into 1,200m shares.
On 10-Apr-08, UURG conditionally agreed to buy Sanxia International Energy Investments Ltd (BVI), which owned a 30% interest in a 9-month-old joint venture to build and operate a pipeline for coal-bed methane, from Mr Chen Keyu for HK$134m, of which $35m would be in cash or promissory notes, and $99m in bonds convertible at $0.25 per share (which, you will note, is 500 times more per share than the conversion price on the bond held by Mr Pong). We know nothing about Mr Chen Kenyu.
On 18-Apr-08, UURG placed 100m shares at $0.204 to Mr Zhou Qijin in a top-up placing via Mr Pong. We know nothing about Mr Zhou, although we note that 100m shares were deposited into CCASS, probably with Sanfull, on 17-Apr-08, the day before the sale, and on 7-May-08 100m shares moved out of Sanfull and into HSBC custodian.
The placing raised $20.2m net to be used "solely for the financing of the acquisition of Shanxi International Energy Investments Limited". On 24-Jun-08, UURG terminated the acquisition on due diligence grounds. In what is a rarity in HK, they got their deposit of $22.45m back.
Third change of control - enter Tony Chan
On 11-Jul-08, Tony Chan agreed to buy from Mr Pong a total of 3,470m shares (62.32%) of UURG and $2.9m of the convertible bonds, for a total of $150.174m, equivalent to $0.0162 per share, triggering another general offer. Mr Pong retained 618m shares and $0.5m of bonds, equivalent to a total of 1,618m shares. So up to this point, Mr Pong had invested $18.47m and cashed out $216.97m. Between 17-Dec-08 and 5-Jan-09 he purchased 59.792m shares for about $9.68m or an average $0.162 per share. That still leaves him with net cash out of $188.82m.
We can see from CCASS movements that Mr Pong's purchases were delivered to the CCASS account of Sanfull. For example, on 5-Jan-09, he purchased 14.8m shares. On 7-Jan-09, the holding of Sanfull increased by that amount.
Tony Chan's offer document was posted on the suitably auspicious day of 08-08-08. Perhaps he just liked the stock code: 8192 is a nice round number in binary, 213, which brings to mind an old maths joke: there are 10 kinds of people in the world: those who understand binary, and those who don't.
On 27-Aug-08 Tony Chan apparently withdrew the share certificates from HSBC's CCASS account - which would not be out of character for a man who wheels truck-loads of cash around - perhaps he put the certificates in a feng shui hole in the basement of one of the Chinachem buildings. Anyway, the stock was deposited with HSBC again on 9-Sep-08.
On 23-Dec-08, UURG announced a change to its current name, explaining that the letters mean "Utilize our renewable energy" (go figure) and "signifies the Group's further diversification and expansion of business in providing green and intelligent building solution and sustainable design consultancy and professional services". All very grand, but what business are they actually doing, and where did they get this expertise? By the 2008 annual report, they decided that UURG stands for "Utilizing the Unlimited Renewable enerGies" (still a bit of a stretch) and said that the Group has "successfully secured the project for providing natural ventilation solutions to the Lujiazui Diamond Mansion in Shanghai."
The group managed service income of just HK$625k in the 6 months to 30-Jun-09, adorning the interim report with windmills and solar panels and the impenetrable slogan "Building the Greensight".
When the bonds are fully converted, there will be 12,368m shares in issue. On 21-Jul-08, the day after Tony Chan's purchase was announced, UURG reached an all-time intra-day high of $0.74, briefly valuing the company (assuming full bond conversion) at $9,152m.
This lunchtime's (25-Sep-09) price of $0.195 values UURG at $2,412m assuming conversion, but it would have net assets of only $12.6m as of 30-Jun-09. So it's about 190 times over-valued, unless you place any value on Tony Chan's management skills, which we don't.
On 22-Sep-09, UURG announced that Tony Chan is considering selling his entire stake in UURG and is in due diligence discussions with a potential purchaser. He's got the urge to purge, and so should other shareholders, before this bubble bursts. No purchaser in his right mind is going to pay the current market price for the controlling stake, unless of course the buyer is acting under the influence of his feng shui adviser.
© Webb-site.com, 2009
Organisations in this story
- CHEONG LEE SECURITIES LIMITED
- Global Token Limited
- GOME Retail Holdings Limited
- SANFULL SECURITIES LIMITED
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