H-share holders have narrowly vetoed a bonus share issue by Guangdong Yueyun (3399) which would have knocked 40% off the dividend in additional tax and destroyed 1.5% of value for H-share investors. This is the board's idea of "providing returns to shareholders".

Guangdong Yueyun bonus share vetoed
30 June 2014

In conjunction with today's article on China Minsheng Bank, it is pleasing to see that holders of H-shares in Guangdong Yueyun Transportation Co Ltd (Yueyun, 3399) have vetoed the board's proposal for a 4 for 10 "bonus issue" of shares. At the H-shares class meeting on 26-Jun-2014, there were 64.49% votes in favour and 35.50% against. As this was a special resolution, under PRC law it needed a 2/3 (66.67%) majority, so by a whisker, the bonus issue will not proceed.

The veto was probably on tax grounds; Yueyun had proposed a "capitalisation of retained earnings", and while the circular failed to say it, this would probably have been treated as a deemed distribution at par value of RMB1 per bonus share, or RMB0.4 per existing share. The 10% withholding tax on that would be RMB0.04 (about HK$0.05), knocking another 40% off the real cash dividend of RMB0.10 per share, and increasing the effective withholding tax to 50%. At Friday's (27-Jun-2014) closing price of $3.32, this would have been a value destruction of 1.5% for H-share holders

Again, we see the usual claptrap in the "Reasons for the Bonus Shares Issue":

"The Bonus Shares Issue is meant to provide returns to Shareholders for their support over the years and to enlarge the base of share capital of the Company."

Why do the Stock Exchange and SFC continue to allow companies to spew out this nonsense when it is demonstrably false? Dividing the pizza into more slices with value-destroying tax consequences and higher transaction costs (from scrip fees and odd lots) does not "provide returns to Shareholders", and converting retained earnings into share capital just reduces the potential for future cash dividends. We also regard the statement as misleading by omission of its tax consequences. The SFC should prosecute companies that make such false and misleading statements.

© Webb-site.com, 2014

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