Lerado settlement could be worth $0.066 per share
2 March 2016
Lerado Group (Holding) Co Ltd (Lerado, 1225) announced this morning that it has settled its dispute with Dorel Industries Inc. (Dorel) over the net asset value of Lerado's former core business which it sold to Dorel back in 2014 for HK$930m (subject to adjustment). The announcement states that US$5.475m will be paid out of an escrow account to Dorel, and the remainder to Lerado.
The announcement is economical with the truth. It fails to state how much will go to Lerado, or what the impact of the settlement will be on Lerado's income statement and net asset value. This, in our view, is material inside information. So we'll make a guess.
An amount of US$10m (HK$77.554m) was placed in escrow on completion, so the balance released to Lerado should be US$4.525m (HK$35.1m). The whole escrow amount was included in Lerado's 31-Dec-2014 accounts in Note 22 under "other receivables".
But that's not the biggest impact. In 2014, Lerado only recognised the undisputed part of the sale proceeds in its accounts, making a provision of HK$307.426m for "deferred consideration", being the amount claimed by Dorel. In the settlement, Dorel has only won HK$42.5m, so that leaves about HK$265m, minus the costs of arbitration and legal fees. Let's allow HK$10m for that (it could be higher), so there should be about HK$255m of profit added back to Lerado's income statement and to its net asset value, unless there is any further tax payable on the gain. Lerado has already provided for HK$30.6m of tax on the disposal in its 2014 accounts.
As Webb-site readers will know, Lerado, since the disposal of its core business, has made a series of highly questionable transactions which have diluted NAV per share and massively enlarged the share base. There are now about 3839m shares outstanding, so the estimated gain amounts to about $0.066 per share. That's about 52% of yesterday's share price of $0.127.
We urge the SFC and Stock Exchange to require Lerado to announce its best estimate of the actual impact on the income statement and net asset value. Shareholders should not have to guess what the company already knows.
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