We look at the HK$24.8bn (US$3.2bn) bubble in Imperial Pacific (1076) surrounding a Macau junket operation and a casino project in Saipan.

Imperial Pacific bubble
8 January 2015

This is a side-piece to today's main article on bubbles in the Chung Nam Network. Imperial Pacific International Holdings Ltd (Imperial, 1076) is not in that network, but it is in a bubble.

Imperial was originally a Fujian food processor called "First Natural Foods Holdings Ltd", listed on 11-Feb-2002 and imploded in Dec-2008, partly because it bought toxic derivatives from Deutsche Bank, which Webb-site Reports warned about on 30-Nov-2007. On 24-Apr-2013 the SFC launched legal proceedings against the founder, his son and son-in-law over alleged embezzlement and false accounting. Bet they never find them.

The stock resumed trading on 6-Sep-2012 after a restructuring by Mr Huang Kunyan, who ended up with 74.99% of the company, turning it into a clean shell. Then on 12-Sep-2013, he sold his stake at $1.00 per share to Cui Lijie (Ms Cui), triggering a general offer. She was described thus:

"She is a jewelry collector and experienced in property investment in the [PRC]. She is well acquainted with people engaged in the eco-tourism, entertainment and gaming industries."

The stock had shot up ahead of the announcement, and on 3-Oct-2013 the SFC issued a concentration warning that 14 shareholders held 94.22% of the company. After the takeover, Ms Cui did not join the board (don't ask why) but on 21-Nov-2013 the whole board was replaced with two EDs with experience in the "gaming industry" and 3 new INEDs.

6 days later, Imperial announced the acquisition of a 5% profit share of a junket operator, Hang Seng Sociedade Unipessoal Limitada (Junket) from the Junket's owner, Ms Cui's younger sister Cui Limei, for HK$400m in 16-year 0% notes convertible at $1 each.

The Junket was established 2 years earlier in Jul-2011 at the StarWorld Casino and had expanded to 7 VIP rooms across StarWorld, Wynn, Galaxy, Sands Cotai Central, MGM and Venetian, covering 86 tables and generating $453m of profit in 2012. The vendor guaranteed that Imperial would receive its money back in profits over 16 years, secured by the notes or cash equivalent, with the guarantee starting at $24m for 2014. A circular went out on 8-Jan-2014 and the deal completed on 19-Mar-2014.

After a 20:1 stock split, the notes held by Cui Limei are convertible into 8bn shares at $0.05. The conversion period begins one year after issue, which is 19-Mar-2015.

On 1-Aug-2014, the SFC put out a concentration warning that on 15-Jul-2014, 19 shareholders held 92.39% of Imperial.

On 12-Aug-2014, Imperial was awarded the Saipan casino license, for which it will pay the cash-strapped government US$15m per year, indexed for inflation, for 25 years with an option for another 15 years. Imperial plans to spend US$7.1bn on the Saipan project in phases, presumably so that the cash flow from each stage can help finance the next one, if you think there's room for Saipan in the increasingly-crowded Asian casino market.

On 2-Dec-2014, Imperial launched a placing of 510m shares (5.99% of enlarged) at $1.55 via United Simsen Securities Ltd to raise HK$774m net. The placing completed on 15-Dec-2014 and you can see the shares entering CCASS with various brokers that day.

After the placing, there are 8515m shares in issue, plus the potential 8bn from the convertible, making 16,515m shares with a market price of $1.50. So the pro forma market value is HK$24.77bn (US$3.20bn). In the interim report at 30-Jun-2014, Imperial had net tangible assets of HK$146m. Add the placing proceeds and you get $920m or about $0.056 per share, so Imperial is trading at about 27 times its net tangible assets. Your expected returns from betting at a casino, while negative, are far better than betting on this bubble.

© Webb-site.com, 2015

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