Kingston (1031): things you should know
30 January 2018
There's a few things that investors should be aware of when considering Kingston Financial Group Ltd (Kingston, 1031). The stock fell 16.61% today to $6.73, following last night's concentration warning from the SFC, that the top 20 holders have 91.653% of the shares as at 8-Jan-2018. That warning was long-overdue, in our view.
- Kingston has 13.614bn outstanding ordinary shares. It also has 3.75bn non-redeemable convertible preference shares (CPS), which were issued on 1-Apr-2011 as part-payment for the acquisition of Kingston Capital Asia Ltd (KCA) from Pollyanna Chu Lee Yuet Wah (Mrs Chu) and her mother Ma Siu Fong (Ms Ma), to prevent the family owning more than 75% of the ordinary shares and thereby satisfy the 25% free float requirement under the Listing Rules. Each CPS pays the same dividend as an ordinary share but has no voting rights. There is no deadline for conversion.
- There were originally 5.25bn CPS, but some have converted. When all remaining 3.75bn CPS have converted, there will be 17.364bn shares, so the true market capitalisation of Kingston is HK$116.9bn at today's closing price. Mrs Chu owns 74.61% of the ordinary shares and all of the CPS, so her combined stake is 80.09% of Kingston.
- Based on the interim report, at 30-Sep-2017, Kingston had net tangible assets (NTA) of just HK$8.813bn, or about HK$0.508 per share including CPS. That is not the "NAV" figure you will see on many trading screens, which only use ordinary shares as the denominator, and which include HK$11.00bn of goodwill on the acquisition of KCA and $0.28bn of other intangibles, being subsurface mineral exploration rights in Saskatchewan, Canada, acquired in a bad-loan settlement in 2013. Kingston has not pursued exploration and didn't make any comment on the asset in its subsequent annual reports.
- Consequently, even after today's plunge, the stock is trading at 13.2x NTA. If it were to trade at NTA, then the stock would drop 92.5% from here.
- In the year to 31-Mar-2017, Kingston had shareholders' profit of HK$1,485m, or $0.0855 per share, leaving the stock on a historic P/E of 78.7 at tonight's closing price. Adjusting for the subsequent 6 months' results, the trailing twelve month earnings are $1,649m, or $0.0950 per share. Even then, the P/E is a whopping 70.8.
- But even then, readers should note that about 73% of Kingston's "adjusted EBITDA" in the interim results comes from margin and IPO financing. This business charges interest rates to customers of "approximately Hong Kong Dollar Prime rate plus 3%", or about 8%, but benefits from a very low cost of financing, the bulk of which is provided by Mrs Chu and her family, as follows.
- At 30-Sep-2017, Kingston had margin financing loans outstanding of HK$21.89bn. These were secured on securities pledged as collateral of HK$79.70bn. In the Webb-site CCASS Analysis System we can see all the CCASS custody positions of Kingston Securities Ltd (KS, the 100% brokerage subsidiary of Kingston) at 29-Sep-2017, totalling about $98.1bn. That includes 51.93% of Tianhe Chemicals Group Ltd (1619) valued at $15.1bn based on the stock price when it was suspended on 26-Mar-2015.
- Our system shows that as at 29-Sep-2018, KS had CCASS custody of more than 30% of 58 listed companies. These likely represent controlling shareholders, many of whom have pledged the securities as collateral for loans. If such large custody positions were just an aggregate of shares held by small investors, then there would be significant holdings of popular stocks such as HSBC (0005), Tencent (0700) or HKEX (0388), but to the nearest 0.01%, the KS CCASS holdings in those blue-chips are currently 0.00%, 0.00% and 0.03% respectively. Kingston also holds between 20% and 30% of the shares in 25 more companies, taking the total of holdings above 20% to 83 companies.
- Looking at the CCASS snapshot of Kingston's ordinary shares, only 18.20% is in CCASS, leaving 81.80% outside. That is 7.19% more than Mrs Chu's known holdings of 74.61%.
- Of the 18.20% which is in CCASS, 12.53% of it, or more than two-thirds, is held via KS. Despite the valuation, it seems that KS clients particularly like the company, relative to clients of other firms. Here's the history of that holding.
- The vast bulk of Kingston's debt funding is provided by Mrs Chu and her family. At 30-Sep-2017, Kingston had total borrowings of $16.00bn, of which bank borrowings were HK$4.19bn (26.2%), while amounts due to the Chu family totalled HK$11.81bn (73.8%).
- Of this, $1.190bn due to Better Sino Ltd (wholly-owned by Mrs Chu) was interest free, while another $1.075bn due to Mrs Chu personally bore interest at 3% p.a.. A further $8.847bn owed to Kingston Finance Ltd (which she wholly-owns) bore interest at just 2% p.a.. A further $0.7bn was subordinated (meaning, it ranks behind other creditors), of which $300m owed to Mrs Chu and $150m owed to her father Lee Wai Man (aka Lee Sui Fok, Lee Shiu Fook, Mr Lee) both bore interest at 1.5%, while $250m owed to Mr Lee bore interest at P+1%. None of these loans were secured, probably because if they had been, then the loans would require independent shareholders' approval.
- Bank money market loans and revolving loans of HK$3.26bn bore interest at 0.91% to 2.57% p.a. and were secured on $9.16bn of margin clients' securities and a few minor assets, while a HK$775m bank floating-rate term loan bore interest at 2.86% to 3.32% p.a..
- Interest expenses of Kingston in the 6-month period totalled $143.32m, equivalent to an overall annualised rate on the average debt at the start and end of the period of about 2.1% p.a..
The family wealth appears to originate from Mr Lee's Macau VIP room operations. According to a 2005 press release, Mr Lee was involved in the Macau casino industry since 1990 and founded the "Gold Club" VIP rooms at the Lisboa Casino, before which he was a "consultant for Caesar's Palace Las Vegas". In 2005, Kingston called Mr Lee "the leading VIP Room operator in Macau". Perhaps this promises an endless stream of financial support with low-cost loans to the listed company via Mrs Chu's Kingston Finance, but we wouldn't bet on it.
© Webb-site.com, 2018
Organisations in this story
- KINGSTON FINANCE LIMITED (HK)
- Kingston Financial Group Limited
- KINGSTON SECURITIES LIMITED
- Tianhe Chemicals Group Limited
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