We examine the recent history of China Motion Telecom (0989), including two aborted acquisitions and a highly dilutive placing "for working capital" at a time when the company was flush with cash. Why did the board agree to that and where did the shares go? We also query the sustainability of margins in a recent acquisition from CMT's controlling shareholders.

China Motion Telecom - recent history
10 December 2009

China Motion Telecom International Ltd (CMT, 0989) was defrauded by two of its former directors, Hau Tung Ying (Mr Hau) and Mr Li Bin, between Sep-00 and Apr-05 using bogus consultancy agreements. They were jailed for 4 years in Feb-09 and thereby inducted into the Webb-site.com Hall of Shame. Li Bin resigned on 19-Dec-05 for "personal reason".

On 23-Dec-05, Wu Chi Chiu (Mr Wu) acquired 41.14% of CMT for HK$15m or $0.0694 per share, a 52% discount to market, triggering a general offer at that price. He became an ED of CMT on 9-Feb-06 and Deputy Chairman and CEO on 6-Mar-06, where he remains.

On 8-Sep-06, Marvel Bonus Holdings Ltd (BVI, Marvel Bonus) agreed to subscribe 1.8bn shares at $0.02 each (an 82% discount to market) for $36m, obtaining 76.58% of the enlarged share capital, and to provide a $30m loan facility. Marvel Bonus is equally owned by Raymond Ting Pang Wan (Mr Ting) and Yam Tak Cheung (Mr Yam). If that name seems familiar, Mr Yam was one of the subscribers of the convertible notes in our China Strategic Bubble story last month.

After the announcement of Marvel Bonus' injection, the shares took off in a big way, rising from a pre-suspension $0.11 on 30-Aug-06 to $0.62 at the end of Sep-06.

On 20-Oct-06, Mr Wu sold all his shares (by then diluted to 9.2% of CMT) in a placing at $0.55 per share or $119m in total.

On 14-Nov-06, Marvel Bonus sold 46,167,578 shares (1.96%) of CMT in a placing at $0.57, or 28.5 times what they paid for them, for gross proceeds of $26.3m, recovering most of its entire investment cost in CMT and cutting its stake to 74.67%. On 20-Apr-07 it sold 100m shares at $0.46 off-market, and on 9-Jul-07 it sold another 100m shares at $0.50 on-market, cutting its stake to 66.16% and cashing in $96m. The remaining shares are currently held via the CCASS account of ABN Amro Bank N.V..

Grand Promise, not fulfilled

On 2-Jan-07, CMT agreed to buy Grand Promise International Ltd (BVI, Grand Promise) from Best Delight Group Ltd (BVI, Best Delight), for $240m, comprising $120m in cash and $120m in 200m shares at $0.60. The owner of the vendor was not disclosed, but a disclosure filing shows that it was Ms Cheung Kwai Lan (Ms Cheung). She is the Chairman and controlling shareholder of China Vanguard Group Ltd (China Vanguard, 8156, formerly B&B Group Holdings Ltd).

Grand Promise owns 49% of a joint venture with registered capital of RMB100m, which has "exclusive authorisation" from the "Cultural Market Development Centre" under the administration of the Ministry of Culture of the PRC, "to develop and operate a nationwide karaoke content administration system". In other words, collecting copyright performance fees for songs and videos.

On 29-Mar-07, the agreement for CMT to buy Grand Promise was terminated because of the "very limited information" available for due diligence. However, that wasn't the last the market had seen of Grand Promise. In Jan-2008, Ms Cheung sold it to China Vanguard for 6.5 times the previous asking price, and that's not all that China Vanguard has been up to, so read today's separate story on that!

Vietnam property

On 14-Aug-07, CMT conditionally agreed to buy Times Square (Vietnam) Investment Joint Stock Co, which owns a parcel of land at 22-36 Nguyen Hue Avenue and 57-69F Dong Khoi Street, Ben Nghe Ward, District 1, Ho Chi Minh City from Eric Chu Nap Kee, for HK$2.59bn, to be satisfied in shares, a convertible bond and a promissory note. CB Richard Ellis (Vietnam) Co Ltd valued the undeveloped site in its existing state at US$328m (HK$2.56bn). The deal was aborted on 4-Dec-07.

Unlisted warrants

On 14-Jan-08, CMT announced the issue of unlisted 2-year warrants to subscribe 460m shares in CMT at $0.345 (a 4.2% discount to market), to Mr Ding Lu, potentially diluting existing shareholders by 20%. He paid just H$1m, or about $0.002 per warrant. Mr Ding "has extensive experience in the telecommunications services and property investment industries of PRC". The reasons for the issue included that it "creates business opportunity with Mr Ding based on his business network". So far none of the warrants has been exercised and they are underwater, as the shares closed yesterday (9-Dec-09) at $0.153. The warrants expire on 22-Jan-10.

Highly dilutive placing

In the depth of the market meltdown, on 1-Dec-08, CMT launched a placing via Kingston Securities Ltd at $0.042 per share (a 19.23% discount to market), raising only $19.5m and diluting existing holdings by 20%, "for general working capital". In our view, there was no need for working capital and this was a classic abuse of the general mandate, given that CMT's interim report at 30-Sep-08 shows net current assets of $168m at 30-Sep-08, including net cash of $184.9m. The placing was also at a huge 76% discount to net asset value. Unusually, none of these 470.02m new shares has been deposited into CCASS, so they remain untraded. We wonder why Mr Ting and Mr Yam were willing to accept this dilution to their majority holding and who the board allotted the shares to.

CMT's deal with Mr Ting and Mr Yam

On 1-Jun-09, Mr Ting and Mr Yam sold Victory Marker Ltd (HK, Victory Marker) to CMT for HK$127m, satisfied by $67.1m of properties in Harbour Centre, Wanchai and $59.9m in cash. Victory Marker owns Jinhan Yintong (PRC) which owns Runxun Concept (PRC) and Hongyi (PRC). These are defined names from the circular - full translations of Chinese names were not given. Runxun Concept was established on 14-Apr-00 and operates retail outlets for mobile phones in Shanghai under the "China Mobile" brand in co-operation with China Mobile Group Shanghai Co Ltd, while Hongyi was established on 23-Apr-03 and wholesales mobile SIM cards in Shanghai.

Mr Ting and Mr Yam acquired the two companies for a total of just RMB3.0m (HK$3.5m) in 2006. They have warranted profits for Victory Marker of $12.7m in the year to 30-Jun-10, compared with $12.5m for calendar 2008 and just $0.7m in 2007. The core business achieved a gross profit margin of 60% in 2008 (p149 of the circular). This depends on short-term (10 months to 3 years) contracts with China Mobile, for whom it operates the stores. Even if you believe the accounts, it is hard to believe that China Mobile would allow such margins to be sustainable in the long run, for which CMT paid 10x earnings. Victory Marker had net tangible assets (after adding back the shareholders' loan) of just HK$11.2m at 31-Dec-08, including $8m of cash. The barriers to competition do not look high.

The connected transaction was approved without objection on 14-Jul-09. So far then, Mr Ting and Mr Yam have paid $36m to acquire control of CMT, then sold a small part of that for $122.3m. They paid HK$3.5m, plus shareholder loans of $4.0m, to set up Victory Marker, and later sold it to CMT for HK$127m in cash and properties. So as a result, they have gained $138.7m in net cash, $67.1m of properties and 55.13% of CMT. Nice work!

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