What does the ability to take a company private for 57 cents on the dollar say about the future of HK's public market? Failure to reform HK's laws and regulations to improve the corporate governance framwork will see the market shrink over time as good companies stay away and controllers take existing companies private.

Hopewell and the lemon discount
22 March 2019

Yesterday, independent shareholders of Hopewell Holdings Ltd (Hopewell 0054) voted to approve its privatisation at $38.80 per share, a 43% discount to the adjusted net asset value of $68.05, according to the scheme document. The NAV was adjusted principally to take account of the current state of the Hopewell Centre II mega-project in Wanchai which, after 30 years of gestation, is finally coming to fruition and will relatively soon be booked into the balance sheet as an investment property. The offer price was, nevertheless, a premium of 46.7% to the last traded price of $26.45 before the scheme was announced. In other words, Hopewell had been trading at a 61% discount to its NAV. The 43% offer discount to NAV on the 547,845,931 shares (63.07%) of Hopewell that the family does not already own is worth HK$16.02bn (US$2.04bn). 

The fact that investors (and presumably, their proxy advisors) were willing to approve this, and that the shares were trading at such a large discount in the first place, speaks volumes about the poor state of corporate governance in the Hong Kong market. Share prices are in most cases just the price of a minority shareholding with no real ability to influence corporate strategy or hold boards to account for under-performance. You get in the back seat of a car and just hope that the driver and his (rarely her) offspring know where they are going and are capable of driving safely and efficiently to their stated destination, avoiding detours and keeping their hands out of the till while they do so. Any so-called "independent directors" that the controlling shareholder elects are only as independent as the controller wishes them to be.

The legal and regulatory framework provides little in the way of remedies for independent shareholders, whether against directors, auditors or sponsors, exacerbating the discount at which stocks must trade, and deterring good, honestly-run companies from going public in the first place. It's George Akerlof's lemon discount.

The poor quality of the framework is ultimately the responsibility of the Hong Kong Government, whose Chief Executive is elected by a so-called Election Committee stacked with "old money" members who oppose reforms, not least because a better framework and a more trustworthy market would raise valuations and raise the cost of taking their public companies private. Hopewell could not have succeeded in privatising at 57 cents on the dollar in a better-quality market.

That's as much evidence the Hong Kong Government should need that failure to reform the corporate governance framework, indeed racing to the bottom by lowering corporate governance standards, will eventually shrink the market as companies are taken private at large discounts to fair value, and good companies won't go public at such discounts. 

© Webb-site.com, 2019

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