Take a RMB8m investment in a start-up TV channel, whip up some projections, sprinkle on a valuation from the ubiquitous BMI Appraisals, add a large pinch of salt according to taste, bake for 2 months and you have a RMB350m sale to Code Agriculture (8153). Too bad that the air then went out of this pudding.

Code Agriculture and Nanjing Everyday
25 May 2010

This story follows on from today's story on Uni-Bio Science and Global Green Tech.

On 21-Sep-2007, Code Agriculture (Holdings) Ltd (Code Agriculture, 8153, then China Chief Cable TV Group Ltd) announced the purchase of 80% of Nanjing Everyday Buy Trading Co Ltd (Nanjing Everyday) for RMB350m (then HK$364m) comprising RMB30m in cash, HK$49.92m in shares at $0.32 and HK$282.88m in 0% 5-year bonds convertible at $0.32. The shares and bonds equated to 72.98% of the enlarged issued share capital. Nanjing Everyday was owned by Law Kwok Keung (Mr Law, 67%) and Mr Lin Fang Chih (Mr Lin, 33%), both described as independent third parties. Mr Law and Mr Lin would retain 13.4% and 6.6% of Nanjing Everyday after the sale.

Mr Law was an ED of Neo Telemedia Ltd (Neo Telemedia, 8167) from 19-Nov-2004 to 1-Mar-2007. We know nothing about Mr Lin.

Nanjing Everyday was a start-up with no business except entering into an agreement 2 months earlier with Jiangsu Digital Media Co Ltd (Jiangsu Digital, PRC) to establish a joint venture called JiangSu BCTV Fashion Media Co Ltd, which would be 49% owned by Nanjing Everyday. The JV company had not yet been incorporated. It was expected to require RMB40m of investment from Nanjing Everyday, of which RMB10m would be injected prior to completion of the sale to Code Agriculture. So for the privilege of owning a RMB8m investment, Code Agriculture was paying the vendors RMB350m.

The JV company was to engage in "direct TV sales, programmes production, advertising agency, design and production". Jiangsu Digital had been authorised by Jiang Su Broadcasting Corp to operate "Channel Dressy", which would be licensed to the JV for 20 years. The company attempted to justify the purchase price by means of a valuation report from BMI Appraisals Ltd (BMI, yes, them again), contained in the circular, which valued the JV at RMB980m, based on 1.45 times the projected sales of RMB2,200m in 2010 and a discount rate of 18.19% p.a.. There was no justification offered for that revenue projection, but the result was that it values 49% of the JV at RMB480.2m and 80% of that at RMB384.16m.

The acquisition finally completed on 28-Apr-2008, at a consideration of HK$365.9m. The net assets acquired (net of the 20% minority interest) were $74.171m (including $66.4m attributed to the TV license), resulting in goodwill of $291.7m. In the annual report for the year to 31-Mar-2009, Code Agriculture said (note 14, p56) that on the basis of another valuation by the same valuer, BMI, it had now determined that the goodwill was impaired by $231.8m. Direct TV sales for the 11 months since acquisition were just $1.5m.

Mr Lin received 51.48m shares and $93.35m of bonds in the sale of Nanjing Everyday. On 2-Sep-2008, he disposed of $77.35m of bonds for $24.17m or $0.10 per underlying share. No buyer filed a disclosure of interest. Three days later, he disposed of his company which owned 51.48m shares for $5.15m or $0.10 per share, to someone called Yim Kai Pung, possibly accountant David Yim Kai Pung. He's an INED of Success Universe Group Ltd (0487).

On 2-Jan-2009, Code Agriculture proposed a capital injection of USD1.65m (HK$12.9m) into Nanjing Everyday, pro rata to shareholdings. Despite having received RMB350m, including RMB30m in cash for the sale of 80% of Nanjing Everyday, and in Mr Lin's case, having sold his Code Agriculture shares and most of his bonds, Mr Law and Mr Lin did not put up their own cash for this relatively small fund-raising, for which their 20% stake would cost them HK$2.57m. Instead, they borrowed it interest-free from Code Agriculture and pledged their 20% stake in Nanjing Everyday as security.

Mr Law received 104.52m shares and $189.53m of bonds in the sale of Nanjing Everyday. On 9-Jan-2009, Mr Law disposed of $64.53m of the bond for $16.13m, a quarter of its face value, or $0.08 per underlying share. No buyer filed a disclosure of interest. On 5-Mar-2009, he disposed of another $32m of the bond for $10m, or $0.10 per underlying share, and on 26-Mar-2009, he disposed of the remaining bonds at $0.10 per share. The final tranche of bonds was purchased by someone named Au Yeung Kai Wah (Mr Au Yeung), whose name has featured in our site before.

In 2006, Mr Au Yeung filed an affirmation in a court case on behalf of Zhuang PP Holdings Ltd, which was a company sold by Willie International Holdings Ltd (0273) to Eugene Chuang Yue Chien in 2003. On 11-Oct-2007, he was also one of the purported vendors in the sale of a company called Leapfly Ltd (Leapfly, BVI) to Forefront Group Ltd (0885) for H$K20m. That followed an aborted sale to the same company at the higher price of $39m on 26-Jul-07. In a curious game of pass-the-parcel, Leapfly had earlier been acquired on 10-Apr-2006 from Willie by Freeman Corp Ltd (0279) for $7m, according to note 36(1) of Freeman's accounts that year. We don't know when Freeman sold it, or to whom. Willie, Forefront and Freeman are all part of what we call the "Chung Nam Network" of companies surrounding Chung Nam Securities Ltd.

On 27-Mar-2009, the day after purchasing the bonds from Mr Law at $0.10 per underlying share, Mr Au Yeung converted them into 290.625m shares equal to 16.52% of Code Agriculture. On 22-Mar-2010 he sold 140m shares at $0.58 in parallel with a placing by the company.

An INED of Neo Telemedia, appointed 31-Mar-2005, is Mr Law Kwok Leung (no relation to Mr Law, apparently), who is CEO and founder of Code Agriculture, back when it was listed as "M21 Technology Limited". Another overlap is Dennis Chan Kwok Sun, who was an NED of Code Agriculture from its 2001 listing until 3-Dec-2008, and was also an ED of Neo Telemedia from 19-Nov-2004 to 28-Mar-2009.

Hopkins CPA Ltd resigned as auditor of Code Agriculture on 1-Apr-2009. It was replaced by KL CPA Ltd, becoming that firm's first, and so far only, listed client.

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