Starting in the basement of St Teresa's Hospital, visiting the Science Park and analysing 12 years of transactions with some lucky disclosure on BVI owners, we follow the movements of 2 cyclotrons in and out of listed companies and show you where the money was made and lost.

Pass the cyclotrons
11 October 2016

This story starts in the basement of St. Teresa's Hospital in Kowloon, where you will find a cyclotron that produces radioactive isotopes for PET scans that detect cancer. The main product, Fludeoxyglucose or FDG, has to be produced in HK because it has a half-life even shorter than some GEM stocks, of about 109.8 minutes, meaning that half of it decays into useless byproducts within that time.

The cyclotron is or was owned and operated by First Oriental Cyclotron Ltd (FOC), which is or was 94% owned by First Oriental Medical Technology Ltd (FOMT) and 6% by St. Teresa's Hospital. FOMT is or was 100% owned by First Oriental Medical Technology Group Ltd (FOMTG, BVI).

Town Health International Medical Group Ltd (TH, 3886) in its annual report for 31-Mar-2004 disclosed that it had acquired 51% of FOMTG (see p21) for HK$11.73m (see p34), implying a total valuation of $23m. Note 23(b) of the accounts puts the consideration payable at $13.3m, perhaps including commissions.

TH ups FOMTG to 78%

About 5 years later, on 1-Jun-2009, TH agreed, via its 100% subsidiary Health Walk Ltd (HW, BVI), to buy 27% of FOMTG from Helix Overseas Holdings Ltd (Helix) for HK$32m, valuing FOMTG at HK$118.5m. This increased HW's stake from 51% to 78%. The consideration was paid in 21,361,815 new shares (6.9%) of TH at $1.498 each. Helix was owned by Belinda Leung Yuet Kwan (Mrs Ng), who was the wife of Ng Yau Sing (Mr Ng), who was one of the founders and a director of FOMTG. Remember that name. A circular went out on 15-Jun-2009. This deal revealed just how profitable the medical isotope business was. In the 2 years to 31-Mar-2008 and the 10 months to 31-Jan-2009, the pre-tax profit margin of FOMTG was 64.5%, 85.1% and 73.3%. Annualising the final period, the profit after tax was $14.88m and the P/E was 8.0.

TH ups FOMTG to 100% and injects it into LK

On 15-Oct-2009, TH, via HW, agreed to buy the remaining 22% of FOMTG from Kingdom Hill Ltd (KH) for HK$19m, valuing FOMTG at $86.4m. KH was owned by Margaret Yeung Tsui Mai Ling (Mrs Yeung), wife of Alex Yeung Wah Hin (Dr Yeung), who was then a director of FOMTG. The consideration was paid in 14,548,238 new shares (4.49%) of TH at $1.29 each.

A prospectus dated 8-Jun-2004 for a company then called Plasmagene Biosciences Ltd (8250), which was 37% owned by the Yeungs and 21% by TH, stated:

"Since 1999, Dr. Yeung had advised...on the establishment and management of a cyclotron and PET scanning facility at St. Teresa Hospital and Hong Kong Baptist Hospital in Hong Kong".

In the same announcement as the buy-in of FOMTG, TH and Hong Kong Health Check and Laboratory Holdings Co Ltd (HKHC, currently known as Jun Yang Financial Holdings Ltd, 0397) agreed that TH would inject HW into a subsidiary of HKHC called Luck Key Investment Ltd (LK) so that LK would be owned 49% by TH and 51% by HKHC. HW (including 100% of FOMTG) was valued at HK$90m and the combined entity at $183.7m.

This pooled HKHC's loss-making health check business with the highly profitable isotope business. The announcement disclosed that for the year to 31-Mar-2009, FOMTG had a pre-tax profit margin of 67.4% on revenue which grew 17% to $24.59m, with a net profit of $13.64m, so the P/E on the acquisition of the remaining minority was 6.33. On the other hand, the business injected into LK by HKHC had lost $38.15m on revenue of $105.6m.

The TH circular on the acquisition of the minority interest in FOMTG went out on 5-Nov-2009 and the transaction completed on 10-Dec-2009.

The acquisition of HW was a Major Transaction by HKHC, so there was an accountants' report on HW in the HKHC circular dated 5-Nov-2009. The only material asset of HW was FOMTG. The circular included an additional 4 months data on HW, up to 31-Jul-2009, showing a pre-tax profit margin of 67.3% on revenue almost unchanged from the year-ago period, so the cyclotron was still humming away.

Note: If profit margins are still that high, then the Competition Commission should be taking a look at the medical isotope sector.

Note 30 indicates that FOC paid rent (license fee) of HK$31,626 per month to St. Teresa's Hospital and that the group was paying a "consultancy fee" of HK$600k per year to Unique Prosperity Ltd (UP), whose directors include Mr Ng and Tommy Yeung Wai Hong (Tommy Yeung), both of whom were directors of FOC. Recent disclosures show that at 22-Aug-2016, UP was owned 95% by Mrs Ng and 5% by Mr Ng.

The sale of HW to LK was completed by 31-Dec-2009.

A second cyclotron

The accountants' report also revealed two transactions relating to Hong Kong Cyclotron Laboratories Ltd (HKCL).

Note 27(a) states that on 12-Mar-2007, HW group acquired "the remaining" 49% of HKCL for HK$49 from unnamed sellers. Note 28(b) states that on 12-Dec-2008, HW sold 100% of HKCL for HK$100 to unnamed buyers. TH's 31-Mar-2009 annual accounts describes the same disposal in note 51(c), showing that HKCL held a deposit paid for the acquisition of property, plant and equipment of HK$9.793m, funded by shareholder loan of $10.97m. HKCL had not previously been mentioned by TH, and it is unclear whether TH also sold the shareholder loan, which was described differently in the circular as "trade and other payables".

HKCL was incorporated on 23-Jan-2006. We pause to note that HKCL has cheap government land out at our esteemed Hong Kong Science Park. Apparently, buying a GE Minitrace Cyclotron and pumping out isotopes qualifies as scientific research worthy of a subsidy.

So who sold the HKCL shares in 2007 and bought them in 2008? To find out, we had to buy several annual returns of HKCL from the Companies Registry (yes, they still have a paywall).

The first annual return, at 23-Jan-2007, shows that the first owners after the formation agent exited on 22-Apr-2006 were HW (51%), UP (27%) and KH (22%). As noted above, HW is owned by TH, UP is owned by Mr & Mrs Ng, while KH is owned by Mrs Yeung. So it appears that HKCL started out as a 3-way joint venture mirroring the ownership of FOMTG (treating each married couple as a single shareholder).

The annual return at 23-Jan-2008 shows that on 12-Mar-2007, HW, UP and KH all transferred their HKCL shares to FOMT, briefly bringing the two cyclotrons under common ownership (100% for HKCL and 94% for FOC).

The annual return at 23-Jan-2009 shows that on 12-Dec-2008, FOMT transferred 78% of HKCL to Isthmus Management Ltd (IM, BVI) and 22% to On Right Development Ltd (ORD, BVI). The directors of HKCL were then Mr Ng and Dr Yeung. So who owned IM and ORD?

The ownership of BVI companies is usually secret, but thanks to the Panama Papers, we can tell you that ORD is or was owned by Mrs Yeung. IM does not feature in the leaks, but we now know, from the prospectus of Astrum Financial Holdings Ltd (Astrum, 8333), one of the latest emissions on the GEM, that IM was incorporated on 14-Jun-2007 and is owned by Mr Ng.

So it appears that the following steps took place, in terms of ultimate owners:

So having started with 49% of the first cyclotron, the Yeungs and the Ngs now had 100% of the second one plus HK$51m of shares in TH and were now in competition with the first one that they had sold. We don't know whether they acquired the shareholder loan to HKCL or left that with TH.

We will return to HKCL later in this article.

Shifting LK off balance sheet

On 5-Oct-2010, HKCH (under its then name of "China Gogreen Assets Investment Ltd") announced that LK would issue 6.10% of its enlarged shares to Bennet Fung Yiu Tong (Dr Fung) for HK$8.1m, valuing LK at $132.7m. He had been an executive director of HKCH until 14-Jun-2010 and of TH until 19-Sep-2008. This diluted HKCH from 51% to 47.89% of LK, so it ceased to be a subsidiary and became an associated company of HKCH. As such, LK's future corporate transactions would no longer be subject to the Listing Rules as it was not a subsidiary of TH either. TH's stake was diluted from 49% to 46.01%. A circular went out on 29-Oct-2010 and the transaction completed on 23-Nov-2010.

For 2 years after that, information on LK was limited to being recorded as an associate in the accounts of TH and HKHC. Notably, LK continued to benefit from an interest-free loan from HKCH, with $123.548m owed at the end of 2010, reducing to $104.138m at the end of 2011 and $67.022m at the end of 2012. TH apparently provided no such financing.


On 5-Feb-2013, Computech Holdings Ltd (now named Interactive Entertainment China Cultural Technology Investments Ltd, IECCT, 8081) announced a memorandum of understanding with HKHC, TH and Dr Fung to buy 100% of LK. An addendum to the MOU was signed on 5-Mar-2013 with a refundable down-payment of HK$38m to the vendors. IECCT didn't disclose the breakdown, but 90% of the deposit went to HKHC, as it announced. This was probably because the acquisition now included not just the shares of LK but also a debt of HK$67m owed to HKHC at this point.

Finally on 16-Apr-2013, IECCT agreed to buy 100% of LK and the loan for a total of HK$85m, comprising $17.979m for the shares and $67.021m for the loan. So TH got just $8.272m for its 46.01% and Dr Fung got $1.097m for his 6.10%. See also the HKHC announcement and the TH announcement.

For IECCT, this was a Very Substantial Acquisition under the Listing Rules, so a circular dated 24-Aug-2013 was published, including an accountants' report on LK for the years 2010, 2011 and 2012 and the 5 months to 31-May-2013. This helps us fill in the blanks.

You might wonder why LK was now worth so little. The circular revealed that on 26-Apr-2012, LK had sold 70% of HW for just HK$6.1m to IM. It didn't say who owned IM, but as noted above, we now know that it is owned by Mr Ng. LK ceased to have any interest in HW, which means it must have disposed of 30% of HW earlier in the period since it acquired 100%.

You will recall that when LK acquired HW in late 2009, its only asset was 100% of FOMTG, which owned FOMT, which owned 94% of FOC, which ran the cyclotron at St. Teresa's, and HW was then valued at $90m and was churning out an annual profit of HK$13.64m. Now 70% of HW had been sold to Mr Ng (via IM) for $6.1m, valuing HW at $8.7m. The value had dropped 90% in just over 2 years. There are two possibilities that spring to mind - either the profit margins of FOC had collapsed in 2010-2011, or HW was sold on the cheap, or some combination of these, assuming that HW had not found another way to consume the profits of FOC. You will recall that Mr Ng was one of the founders of FOMTG, and his wife sold 27% of FOMTG to TH back in 2009 for HK$32m. So in 2012, via HW, he got 70% back for HK$6.1m, and this was not subject to the Listing Rules, because at the time, LK was not a subsidiary of a listed company, only an associate of two.

What about the other 30% of HW? Note 23(b) of the accountants' report shows that when LK sold 70% of HW on 26-Apr-2012, HW had net assets of $11.796m including non-controlling (minority) interests of $3.619m (being 30% of HW and 6% of FOC). LK also released a $12.178m gain from its equity from the earlier disposal of 30% of HW. Now look back to the consolidated statements of changes in equity on PDF p89, and you will see the $12.178m being booked to other reserves in 2010, along with non-controlling interest of $1.822m, for a total of $14.000m, which is also shown as "net cash inflow arising on disposals of partial interests in a subsidiary" in the cash flow statement on PDF p92.

So it is clear that in 2010, LK sold 30% of HW for HK$14m, valuing HW at only $46.7m, or about half what LK paid for it a year earlier. The words "disposals" and "partial interests" are in the plural, perhaps indicating more than 1 buyer. We can be more precise about when this happened, because LK was a subsidiary of HKCH until 23-Nov-2010 and there is no sign of the disposal in the 2010 HKCH accounts, so the sale of 30% probably happened in the last 38 days of 2010.

IECCT completed the purchase of LK on 30-Sep-2013.

TH buys back HKCL

Now remember the second cyclotron out at the Science Park run by HKCL? When we left that story above, on 12-Dec-2008 it was 78% owned by Mr Ng (via IM) and 22% by Mrs Yeung (via ORD). There were changes in ownership after that.

On 27-Aug-2013, TH bought 70% of Ever Full Harvest Ltd (EFH, BVI) and a $10.4m shareholder loan from one Yuen Siu Wah (Mr Yuen), an "independent third party", for HK$21m. EFH was incorporated in the BVI on 1-Nov-2011 and its only material asset was 100% of HKCL. We know nothing about Mr Yuen, but an ophthalmology doctor with that name works for TH and they may or may not be the same person.

BVI companies are a black box, so we can't find out who owns the other 30% of EFH, but the 23-Jan-2013 annual return of HKCL shows that until 23-Mar-2012, HKCL had 4 shareholders, all of whom transferred their stakes on that date to EFH. One of those was IM with 30%, and as noted above, we now know it is owned by Mr Ng. The others were one Cheung Lam Hung with 22%, Sunny Profit Group Ltd (SP, BVI) with 28%, and Mr Yuen, with only 20%. We don't know how Mr Yuen ended up beneficially owning 70% of EFH before selling it to TH.

What we do know is that eventually SP became a 100% subsidiary of TH. We know this because SP was mentioned as a pre-IPO shareholder in the Application Proof of an aborted GEM listing called CCBA International Holdings Ltd (CCBA) dated 21-Mar-2016 and sponsored by Convoy Capital Hong Kong Ltd.

Regulatory note: HKEX deletes these documents from its web site after the application is scrapped, creating memory holes, so download them while you can. We do, and we call on HKEX to stop deleting history.

Fortunately CCBA is having another go, so the new application proof dated 26-Sep-2016 is here. Both documents cryptically say that SP agreed on 6-Dec-2013 to buy into the precursor of CCBA, but they don't say who owned SP at the time, only that it is now wholly owned by TH.

TH subscribes 9.9% of LK

TH, having completed the sale of its stake in LK on 30-Sep-2013, didn't stay out of it for long. On 26-May-2014, IECCT signed a non-binding memorandum of understanding with TH under which TH would invest "not less than HK$50m" in cash for shares of LK, to allow IECCT "to allocate more of its internal resources to the development of mobile-online gaming business". TH made a corresponding announcement. However, the scale of this proposal was dramatically reduced when on 26-Aug-2014, LK issued 1170 new shares (9.9%) to TH at HK$2308 per share for a total of $2.7m, diluting IECCT (by then named "China Mobile Games and Cultural Investment Ltd") from 100% to 90.1% and valuing LK at $27.28m. TH made a corresponding announcement.

TH injects HKCL into LK

On 31-Dec-2014, IECCT announced that TH would inject its 70% of EFH and part of its shareholder loan into LK in exchange for 4570 new shares (27.88%) of LK valued at HK$11.882m or $2600 per share, close to the net asset value of LK at 31-Oct-2014.

The only material asset of EFH was 100% of HKCL, so in effect this passed 70% of HKCL to IECCT. Combined with the earlier subscription, TH would now have 35.02% of LK and IECCT would have 64.98%. The TH announcement is here. The owner of the other 30% of EFH was named as Open Fortune Ltd (OF, BVI), the owner(s) of which were not disclosed. EFH made a net profit of HK$1.469m in the 9 months to 31-Dec-2013 and $2.111m for the 10 months to 31-Oct-2014. Revenue was not disclosed.

Regulatory note: the Listing Rules accounting disclosure requirements on "Discloseable Transactions", which can involve up to 25% of gross assets of the acquirer (and much more of the net assets), are grossly inadequate to inform the market. All that LR 14.58 requires is the target's profit before and after tax, which may include all sorts of distorting items such as gains on disposals/acquisitions of subsidiaries, goodwill impairments or property revaluations. On the balance sheet, all we get is gross and net assets, which may include goodwill and other intangible assets. Investors deserve more information in order to assess whether boards have made reasonable transactions and their impact on future profitability and on net tangible assets. At the minimum, this should include a proper income statement and balance sheet, whether audited or not.

EFH owed its shareholders a total of $16.6m, including $10.4m to TH, and only $6.333m of this was transferred to LK, so TH would continue to finance EFH with $4.067m. TH perversely claimed that this financing was due to its remaining indirect 24.5% interest in EFH via LK, but of course it also had an interest in the loan held by LK.

At the time, IECCT was 25.87% owned by Convoy Global Holdings Ltd (Convoy, 1019) and 12.02% by China New Economy Fund Ltd (0080). Convoy was 21.16% controlled by TH.

LK issues shares to Kevin Cho Kwai Yee

The latest manoeuvre by LK, announced on 6-Oct-2016, is to issue new shares for HK$21.136m to Kevin Cho Kwai Yee ($13.737m) and TH ($7.399m) at about NAV per share. As a result, IECCT's stake will be diluted to 50.50%, TH will still own 35.02% and Kevin Cho will own 14.48%. Kevin Cho will be employed as CEO of Hong Kong Health Check and Medical Diagnostic Group Ltd (BVI), a 100% subsidiary of LK. He was an ED of TH from 2001 to 2008, and is the brother of Roy Cho Kwai Chee, the founder of TH who is still its Deputy Chairman. LK made a net profit of $14.567m in 2015, so the investment is on a P/E of 5.1.

The questions

The foregoing analysis raises a number of questions:

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