Lerado's umbrellas and open offer
27 October 2015
Our suspicions have once again proved correct. In our article on China Automotive Interior Decoration Holdings Ltd (CAID, 0048) of 10-Oct-2015, we wrote about its stake in umbrella-maker China Jicheng Holdings Ltd (CJ, 1027):
"So now we have identified 2 shareholders of the umbrella bubble, namely CAID with 1.52% and China Environmental Energy Investment Ltd (CEEI, 0986) with 2.11%, out of the 25% float... Given the other identified connection between CAID and Lerado Group (Holding) Co Ltd (1225), we suspect that Lerado's massive market gains for the first half of 2015 also involve a shareholding in CJ, but so far, they're not saying."
We filed a complaint with the Stock Exchange and SFC about the lack of disclosure by Lerado, and on Friday night, Lerado disclosed its investment portfolio at 30-Jun-2015. Of the $702.08m of investments, CJ accounts for $624m, which implies that Lerado holds 300m shares (2.00%) of CJ. Lerado only held 4 other investments. Not by coincidence, each and every one of them was mentioned in our article Bubbles and troubles (24-Sep-2015) regarding the network of companies which includes both CAID and Lerado.
One of these holdings was previously disclosed, China Investment and Finance Group Ltd (CIFG, 1226), which in turn had a cross-holding in Lerado received in exchange for a property. Lerado subscribed for its shares in CIFG at $0.275 on 21-May-2015. Lerado's subsidiary Black Marble Securities Co Ltd is currently "underwriting" an abusive deep-discount open offer by CIFG, and Lerado is also proposing a similarly abusive deep-discount open offer.
After we urged the Stock Exchange to prohibit Lerado and CIFG from voting to approve each other's open offers due to their material interests in the outcome, what did the companies do? Each of them decided to sell their shares, unwinding the cross-holding:
- Lerado sold its 103.392m shares (9.89%) of CIFG at $0.076 on 29-Sep-2015, via Gransing Securities Co Ltd and Kingston Securities Co Ltd. You can see the CCASS settlements here. The sale was a 72.4% loss for Lerado.
- Next, CIFG sold its 71.916m shares (7.49%) of Lerado in two chunks via Astrum Capital Management Ltd, selling 23.5m shares on 5-Oct-2015 at $0.242, and the remaining 48.416m the next day at $0.248, for an overall average of $0.246. You can see the first settlements here, and the second settlements here. CIFG received its Lerado shares in exchange for property on 31-Mar-2015 at $0.50 each, so it has made a 50.8% loss.
The fact that both companies were willing to sell their shares at substantial losses, when the losses were largely due to the announcement of their respective open offers, after their ability to vote was questioned, supports the thesis that the only reason they held the shares in the first place was to support each other's abusive transactions. The shares were remarkably easily absorbed by buyers, suggesting that they had been lined up in advance - no dumping. Lerado's share price actually gained 2.5% on the first day and 1.6% on the second day of the sale by CIFG. Whether the buyers will vote in favour of the open offer remains to be seen.
Returning to Lerado's announcement, other than CJ and CIFG there are 3 other holdings, by far the largest of which was Convoy Financial Holdings Ltd (Convoy FH, 1019), at $33.81m, implying that Lerado owned 34.5m shares (1.40%) of Convoy FH. As we mentioned on Bubbles and troubles, Mark Mak Kwong Yiu, a so-called independent director of Lerado, is CEO of Convoy FH. There is also a holding of 4.6m shares (0.89%) of China New Economy Fund Ltd (CNEF, 0080), and a small holding of $18k (20,000 shares) in Finsoft Financial Investment Holdings Ltd (Finsoft, 8018). As we explained in our article on 31-Dec-2014, Some bubbles for New Year, both Convoy and CNEF had invested in the Finsoft bubble. The bubble expanded further and then burst, down a net 91.58% since the article. According to CNEF's interim report at 30-Jun-2015, it still held 2.50% of Finsoft, down from 4.34% at the end of 2014, and it held 1.46% of Convoy FH.
So, now we know 3 network shareholders of the Jicheng umbrella bubble: CAID with 1.52%, CEEI with 2.11% and Lerado with 2.00%, a total of 5.63%, or 22.52% of the float. Would anyone else like to own up?
Vote against Lerado's open offer
Lerado has now published its circular for the Special General Meeting on 10-Nov-2015 to consider the proposed open offer.
Lerado's 300m shares in CJ are still worth (if you believe the market price) HK$561m, far more than the $422m it aims to raise in the open offer, and more than twice Lerado's current market value. So you might think they could just sell the CJ shares instead - but that would spoil the game for the other companies in this network by crashing the CJ price. You might think that no sensible board would not sell CJ shares which (at $1.87 yesterday) are still trading at 55x NAV and 42.5x their IPO price - but that assumes that the board makes decisions sensibly and independently. The circular, including a laughable letter from the so-called independent financial adviser, is devoid of any discussion of this funding option. We call on the Stock Exchange to require Lerado to explain why it does not sell the CJ shares instead of raising cash in the open offer.
We still have a chance to stop this extortion and restore some value to Lerado's share price, which has been heavily depressed by the proposed open offer, of 3 shares at $0.15 for every share held. The price on 14-Aug-2015 before the announcement was $0.47 and it closed yesterday at $0.241, down a net 48.7%, and far below its net tangible assets per share, which (exclude the stock-gains) at 30-Jun-2015 is around $0.728, plus a possible $0.32 if they win the arbitration with Dorel. Any gain made from selling the CJ shares before the bubble bursts would be a bonus.
Vote AGAINST both resolutions. If you hold your shares through a bank or broker, instruct them to vote, and see our voting guide here. If your bank or broker refuses to cooperate then contact us with details and we will name and shame them. Don't sit back and expect others to carry the day - our editor David Webb holds over 8%, but that is not enough on its own to win. The trading in the shares goes "ex-vote" on 3-Nov-2015, so anyone who holds or buys before that date can vote.
© Webb-site.com, 2015
Organisations in this story
- CHINA AUTOMOTIVE INTERIOR DECORATION HOLDINGS LIMITED
- China Environmental Energy Investment Limited
- China Investment and Finance Group Limited (KY)
- China Jicheng Holdings Limited
- China New Economy Fund Limited
- Convoy Global Holdings Limited
- Finsoft Financial Investment Holdings Limited
- Lerado Financial Group Company Limited
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