6 August 2007
Things have been moving fast since our article criticising EganaGoldpfeil (Holdings) Ltd (Egana, 0048) was published late on 26-Jul-07. The day after, a Friday, the stock fell 48.3% to $2.74. Management held a press conference that day, in which, according to the Standard, they denied that Egana had any business relations with Upbest since 1998.
Egana's shares briefly traded during the pre-opening session on Monday 30-Jul-07, while the management was in a conference call with Citigroup and institutional investors. The call came to an abrupt end when one of the investors asked why the stock had been suspended at 10.00, something which was clearly a surprise to the directors on the call, although Egana later claimed that the suspension was made at its request. The stock has not traded since, while investors await clarification.
Investors had evidently digested our article over the preceding weekend, and a lot of interesting questions were asked, some of which were answered. In the interests of fair disclosure, Webb-site.com has obtained a recording of that call, and you can listen to it in glorious MP3 by downloading it. We did not participate in the call.
During the call, Egana's management admit that Upbest Group Ltd (Upbest, 0335) is the "LISTED CO" manager of the closed-end investment funds which has been referred to in its accounts since 2002. As LISTED CO is cross-referenced elsewhere in the accounts, it follows from this admission that:
- Upbest is the group with which Egana had placed substantial "deposits" for possible acquisitions as at 31-May-02 (note 18(c)(iii)) and as at 31-May-03 (note 21(c)). See below for information on earlier deposits we have discovered since our last article.
- "the controlling shareholder of the LISTED CO" was Mr Charles Cheng Kai Ming, the controlling shareholder of Upbest.
- Mr Cheng had a beneficial interest in the private company which issued equity-linked notes to Egana (note 18(c)(i) of the May-02 accounts and similarly in later accounts)
- Mr Cheng was a director of the owner of the company which in Dec-00 bought the EganaGoldpfeil men's wear trademark for Greater China, generating income of $75m for Egana, a substantial part of its $91.75m (as restated) net profit for the year to Dec-00, and which Egana bought back in Aug-01, as stated in note 13(a) of the May-02 accounts.
- Mr Cheng had beneficial interests in one of the purchasers of a minority interest in Junghans Asia, the sale of which (to two purchasers) generated an $80m gain in the year to May-02, preventing a net loss for the 17-month year (note 4(a) of the accounts). Egana bought back the stake in Jun-04 for $86m and booked it as goodwill.
- the aborted investment in a gas project, which Egana now discloses was in Zuhai, was through a private closed-end fund managed by Upbest (note 17(b)(ii) of the May-02 accounts and 18(a)(iv) of the May-03 accounts). Although it is now clear that this was not the same gas project as Grand Field's, which was in Chongqing, it is also clear that Upbest was involved in both projects.
Regarding deposits for possible acquisitions, after we published our article, we looked back further in the accounts and found a similar unsecured deposit of $204.8m at 31-Dec-00 (note 18(d)(i)) with "an independent third party, a subsidiary of a Hong Kong listed company, as deposits for the proposed investment in a Hong Kong listed company introduced by the third party". The proposal did not proceed and the money was subsequently refunded.
Looking back a further year, we found a "sincerity deposit" of $140.4m at 31-Dec-99 with "an independent third party, a company incorporated in Hong Kong, as sincerity deposit for the proposed investment in a group of companies introduced by the third party." In both years, the deposits were interest-bearing at commercial rates, whereas in the following 2 years (31-May-02 and 31-May-03), they were interest-free. Upbest was listed on 18-Oct-00, so the descriptions of the borrower would be consistent with Upbest, although it could be a third party.
During the call, management stated that about half of the HK$821m of promissory notes as at 30-Nov-06 were amounts lent to small to medium sized customers which generate about 10% of Egana's revenue, and that the others were amounts lent to various "finance companies" in Hong Kong and overseas. They did not say whether that includes Upbest or Upbest-related companies.
On sabbatical, but in day-to-day control?
During the conference call, investors asked why the Executive Chairman Hans-Joerg Seeberger was not on the call. Management said he has been "on sabbatical" since April, and will not be back until the end of September. This is interesting on two levels:
- Mr Seeberger's name has been appearing in company announcements, some of which state that each of the directors take responsibility for the accuracy of the announcement, including this one on 27-Jul-07 regarding the plunging share price. How does he take responsibility if he is on sabbatical?
- According to page 110 of the latest directors' report, the company's various bank facilities contain conditions that Mr Seeberger should "control the day-to-day management" of Egana, and it will be an event of default if he doesn't, in which case all amounts may become immediately due and payable. Is he still controlling day-to-day management while on a 6-month sabbatical?
The most recent announcement dated 1-Aug-07, stated in the footnote that Mr Seeberger was "not able to approve this announcement due to health reason".
As an amusing but minor detail, during the call, Egana's management attempted to justify the investment in Tonga Group Holdings Ltd, which was pursuing a forestry project in Suriname and a B2B building materials platform, as described in our article. They said that they hoped to supply wood and building materials to the Beijing Olympic village. We find that story hard to believe, because:
- the annual reports never mentioned that purpose; and
- the first investment in Tonga was in Dec-00, followed by investments in Feb-01 and Mar-01, but Beijing didn't win the contest to host the Olympics until 13-Jul-01.
Andy Ng Yick Man has resigned as an INED of Egana, Incutech (0356), UBA (0768) and Upbest, by reason of "too much workload". David Wong Wai Kwong has resigned as an INED of Upbest and UBA by reason of "too much workload", and resigned as an ED of Incutech "in light of his recent workload".
Since 26-Jul-07, Upbest shares are down 33.5%, Incutech down 43.8%, and UBA down 7.1%.
Meanwhile, on 3-Aug-07 Tonic (0978) announced that Egana directors Peter Lee Ka Yue and David Wong have resigned as ED and NED of Tonic respectively, "by reasons of their recent workload and Egana's anticipated disposal of its interest in [Tonic] (subject to definitive documentation to be entered into)." Egana owns about 20% of Tonic, but apparently not for much longer.
© Webb-site.com, 2007
Organisations in this story
- China Merchants Land Limited
- DT Capital Limited
- EGANAGOLDPFEIL (HOLDINGS) LIMITED
- UBA INVESTMENTS LIMITED
- UPBEST GROUP LIMITED