Kanstar Won't Star
10 August 2004
At the end of Jul-04, pulp and paper manufacturer Kanstar Environmental Paper Products Holdings Ltd (Kanstar, 8011) was the 9th largest stock on the GEM, with a market cap of HK$1.64bn. At today's close of $0.39 per share, the market cap was $1.56bn (US$200m).
But Kanstar has net tangible assets at 31-Dec-03 of only $54.0m, or about $0.0135 per share, so it is trading at about 29 times net asset value.
The stock was listed on 12-Jul-02 following a placing at $0.04 per share (adjusted for the subsequent 5:1 split) so it is up 875% since then. The top 25 placees in the IPO took 98.6% of the deal, and the top 10 accounted for 74.3%.
Kanstar is 75% held by the 31-year old Chairman and Managing Director Jacky Chim Kim Kiu (Jacky Chim), leaving a public float of 25%, the minimum under the Listing Rules. However, 5.5% is held by his dad, the seemingly irrepressible former legislator Chim Pui Chung (P C Chim), who has convictions for conspiracy to forge share transfer documents as well as election malfeasance, and served 10 months of a 1 year jail sentence in 1998 for the former. As Chim senior is not on the board, he counts as a member of the public for the purposes of the Listing Rules.
In Jun-96, the SFC brought a civil action against P C Chim in the High Court, and on 19-Nov-99, he was found by the court to have "engaged in conduct which was prejudicial to the interests of the minority shareholders" of Massive Resources International Corporation Ltd (Massive, 0070) then known as Mandarin Resources. The judge also ordered that P C Chim be declared "unfit to hold a position of management in Mandarin Resources and that he be disqualified from acting as a director of Mandarin Resources."
Eventually on 22-Jul-00 P C Chim and the SFC announced a settlement of the action, including a general offer by Chim to buy out the minorities, as well as HK$30m in costs to the SFC. Chim agreed to divest himself of "any material interest" in Massive and not to act as a director of any HK-listed company for 3 years. Although he did divest, he has recently reinvested in Massive, rising above 5% on 5-Mar-04 and holding 19.06% as of 2-Aug-04. He has also acquired 28.6% of Northern International Holdings Ltd (0736) on 10-Mar-04 for HK$30m, becoming its largest shareholder. The announcement sang the praises of Mr Chim as a former legislator, but it neglected to mention his criminal record, and said that Chim planned to become non-executive Chairman of the company, although that hasn't happened yet.
Prior to that investment, he held 28.1% of Credit Card DNA Security System (Holdings) Ltd (1051), and sold 23.2% for $0.013 per share or $21.4m on 16-Feb-04. Remarkably, the stock has since soared 222%, from $0.023 on 16-Feb-04 to $0.074 today, valuing the firm at HK$760m - this for a company with negative net tangible assets, which hasn't made a profit in years, and where the auditors disclaimed their opinion in the accounts for the year to 30-Jun-03. That stock deserves a separate story, but suffice to say that we think it is another bubble in search of a pin.
Stock investment is not P C Chim's only comeback effort: he is now running for election to the Legislative Council, trying to get back his seat in the brokers' "Functional Constituency" (yes, in Hong Kong, special interests are constitutionally protected). In a way, we hope he wins, because in our opinion it would completely discredit the functional constituencies and their small-circle elections and hasten the onset of universal suffrage. He had previously told The Standard in Aug-03 that he would run for a directly elected seat on Hong Kong Island. Now that would have been entertaining.
Anyway, back to Kanstar. Apart from the 80.5% held by the Chims, at 31-Mar-04 employees and directors held a total of 183.85m options equivalent to 4.60% of the issued shares with an exercise price of $0.002 per share, expiring between 2007 and 2008. Theoretically, at current market price, these options have an intrinsic value of $0.388 each, or $83.9m, but we would be amazed if they could cash out without crashing the price.
Another executive director of Kanstar is Ip Kai Cheong, who is "responsible for the Group's general management and financial control". Before joining Kanstar in May-99, Mr Ip held managerial positions with Grand Field Group Holdings Ltd (0115) then known as Chintex Oil and Gas Co Ltd, which was also once Chaired by P C Chim and where sons Jacky Chim and Ricky Chim Kim Lun were on the board.
Despite the inflated stock price, there is actually a real pulp and paper business in Kanstar, and turnover has been growing steadily from zero in 2000, but they have yet to make an annual profit and the directors have been lending money to the group ($3.8m was outstanding at 31-Dec-03) and waiving their fees.
After applying a discount for being a minority shareholder, in our view Kanstar shares are probably worth less than the net asset value of $0.0135 per share, which would indicate a potential downside of over 96% from the current price. If you hold the stock, get out while you can.
© Webb-site.com, 2004