Guo Xin Toxin
29 May 2002
Last Thursday we told you again about the Interchina bubble, which had been freshly inflated following MSCI's announcement that the stock would join its small-cap index. On Friday, that stock fell 15%.
Mr Zhang Yang (Mr Zhang), the Chairman and controlling shareholder of Interchina Holdings Ltd (Interchina, 202), is also the Chairman and controlling shareholder of Guo Xin Holdings Ltd (Guo Xin, 1215), until recently known as Wah Lee Resources Holdings Ltd.
The sordid history of this company is beyond the scope of this article, suffice to say that it was first listed on 17-Jan-97 and was then an authorised distributor of various air-conditioners, audio-visual products and photographic products to the PRC market. It went into provisional liquidation on 20-Apr-00, was rescued, then went bust again, and was rescued by Mr Zhang with a restructuring which completed on 10-Dec-01.
In that restructuring, Mr Zhang injected HK$55m for 5,500m shares at $0.01 each. He also received 16,500m warrants to subscribe new shares at the same price. As a result, the interim report shows that Guo Xin had unaudited net tangible assets of just HK$1.627m at 31-Dec-01.
On 13-Dec-01, Mr Zhang sold 2,000m shares at $0.052, raising $104m. The placing was done through Interchina Securities Ltd, which is controlled by Interchina, and through Shenyin Wanguo Capital (Hong Kong) Ltd.
On 7-Feb-02, Mr Zhang exercised 11,500m warrants, injecting $115m. This increased pro forma net assets to $116.6m. There were then 21,862m shares in issue, so net tangible assets per share were $0.0053 per share.
On 11-Mar-02 he sold 799m shares in the market between $0.052-0.054 each, so we'll call that $0.053 and proceeds of $42.3m. Between 12-15-Mar-02, he sold a further 706.06m shares between $0.045-0.053 each, so we'll call that $0.049 and proceeds of $34.6m.
On 18-Apr-02 he sold 374.58m shares at between $0.033-0.037, so we'll call that $0.035 and proceeds of $13.1m.
The next day, Mr Zhang sold 3,500m shares at $0.03 to raise $105m. The placing was done through Interchina Securities and Kingston Securities Ltd.
In summary, Mr Zhang has injected $170m for 17,000m shares, and sold a total of 7,379.64m shares for $299m, or an average of $0.03405 per share, or 7.6x net asset value. So before any expenses, he has received net cash of $129m.
Mr Zhang now owns 9,620.36m shares and 5,000m warrants, exercisable at $0.01 each. The shares closed on Friday 17-May-02 at $0.037 each, so the shares are valued at $356m and the warrants have an intrinsic value (the difference between market price and exercise price) of $135m, for a total of $491m.
Of course, none of this changes the reality, that Guo Xin has net assets of just $0.0053 per issued share, and the shares trade at 7.0x net asset value. The market capitalisation is HK$809m, but net assets are only about $117m.
Of course, it may be a pure coincidence that both Interchina and Guo Xin are trading at bubble prices and that both companies are controlled by Mr Zhang.
Beware the Guo Xin Toxin.
Since we published the above article, it has been disclosed on 22-May-02 that Mr Zhang has exercised the remaining 5,000m warrants at $0.01 each on 14-May-02, at a total cost of $50m. The same day, he sold 120.36m shares at $0.038-0.039 each, and two days later he sold 5,000m shares at between $0.039-0.046 each. We estimate from the mid-prices that the total sale proceeds were $217m, so the net cash extracted (excluding expenses) was $167m. That takes Mr Zhang's net cash received to $295m. His resulting shareholding is 9,500m shares, and there are 26,862m shares in issue, so he has a stake of 35.4%.
The pro forma net tangible assets are now about $167m, so NTA per share is about $0.0062.
On 16-May-02, the same day as the latest sale of 5,000m shares (or about 18.6% of the company) Guo Xin put out a standard statement that:
"We have noted the recent increases in the trading volume of the Company and wish to state that we are not aware of any reasons for such increases."
Surely the company is aware of what its Chairman is doing?
© Webb-site.com, 2002