Webb-site Reports

Concluding our hexalogy, we look at a recent deal by COMG (0254). Existing shareholders were diluted to 2.54% in an acquisition valued at HK$1242m for a business which would need capital of HK$3.6m. We estimate that the vendor has already cashed in about $1812m by selling convertible bonds and shares. We also look at what comes next for COMG, and some unfinished business for the authorities.

Raking muck, Part 6
11 March 2012

Moving quickly on from Part 5, we present the final part of a series which has covered these 10 companies:

China Outdoor Media Group Ltd (COMG, 0254)
China Post E-Commerce (Holdings) Ltd (CPEC, 8041)
China Railsmedia Corp Ltd (Railsmedia, 0745)
China Yunnan Tin Minerals Group Co Ltd (CYTM, 0263)
CNC Holdings Ltd (CNC, 8356)
Hycomm Wireless Ltd (Hycomm, 0499)
Inno-Tech Holdings Ltd (Inno-Tech, 8202)
Simsen International Corp Ltd (Simsen, 0993)
Wo Kee Hong (Holdings) Ltd (WKH, 0720)
Zhi Cheng Holdings Ltd (Zhi Cheng, 8130)

In part 6, we look at the most recent value-destroying deal by COMG, and what might happen next.

GMG Media

On 28-Dec-2009, COMG announced that it would buy 100% of GMG Media Group Ltd (GMG Media), a BVI company with no turnover and no assets, for HK$1241.89m, of which $13m was in 100m shares and $1228.89m in 5-year 0% convertible bonds, both at $0.13 per share. The vendor was named as Jiang Qi Hang (Mr Jiang), a former securities sales representative. Our records show that he was last licensed at BOCI Securities Ltd until 3-Jan-2006. According to the announcement, in the 1990s he worked for Procter & Gamble (China) Ltd in brand management. The plan, via a contractual arrangement with a PRC company (to get around PRC ownership restrictions for foreign companies without 3 years' experience in the advertising industry) was to install 100 wide-screen displays in mainland shopping malls and share the advertising revenue with them.

The PRC company is Beijing Mega TV Media Advertisement Co Ltd (BMTMA). Its management shareholders pledged 100% of the shares to COMG, and entered an irrevocable share transfer agreement, so that when law allows, COMG can take legal ownership. In the meantime, a management agreement passes 100% of the net profit (if any) of BMTMA to GMG Media. BMTMA had no turnover in 2009 and net assets of just HK$1.9m at 31-Dec-2009. Most of that was an advance to Guangzhou Mega TV Advertising Media Co Ltd (GMTAM), which is "principally engaged in the development and manufacturing of rear-projected mega televisions". GMTAM would lease the indoor large screen TV systems to GMG Media. An "associate" of Mr Jiang owned 63% of GMTAM and 38.25% of Shanghai Mega TV Cultural Dissemination Co Ltd (SMTCD), which is "principally engaged in the design, production and publication of advertisements". GMTAM and SMTCD agreed not to compete with GMG Media in shopping malls and department stores.

According to the circular dated 26-Mar-2010, the installation cost of these screens would be about RMB6m over 5 years, the initial capital requirements to implement the business model of GMG Media are approximately RMB3m (then about HK$3.6m) and "there is no significant entry barrier for the business". So why would anyone pay HK$1242m for that?

The circular contained another ample valuation by Ample Appraisal Ltd, which has also done valuations for CNC, CPEC and Inno-Tech as mentioned in previous parts of this series. The financial adviser on the profit forecast was Athens Capital Ltd (Athens), which also did work for CNC when it bought a stake in CNMHK as mentioned in Part 1. Notably this time, nobody from Athens put their name on the signature page. The deal was approved at the EGM on 19-Apr-2010 and completed on 22-Jul-2010.

The consideration shares would give Mr Jiang 8% of COMG and the bonds would expand that to 97.44%, diluting existing holders to just 2.56%, but the bonds are only convertible as long as the holder does not become a controlling (30%) shareholder, thereby avoiding the listing rules on reverse takeovers. The 100m shares were probably deposited with (guess who) Tanrich Securities Co Ltd (Tanrich), on 27-Jul-2010. So there's another independent vendor who prefers to use Tanrich Securities, of all the brokers he could use, as did Kwok Ming Fai, Vicky Yu Wai Yin and Frankie Ma Hoi Cheuk in Part 2 of this series. Mr Jiang sold all the 100m shares off-market at $0.265 on 6-Aug-2010, the same as the previous day's closing price.

Bond conversions and sales

On 13-Aug-2010 COMG and Mr Jiang agreed to accelerate the convertibility of the bonds, which originally were not convertible until 6 months after issue, to make them immediately convertible. This was amended again 4 days later, because as a director of a subsidiary of COMG, Mr Jiang was a connected person and the amendment needed independent shareholders' approval. Joseph Lau still owned 21.90% and could vote. A circular went out on 30-Aug-2010 and the amendment was approved at the EGM on 15-Sep-2010. Three weeks later, Mr Jiang began converting, and as far as we can tell:

On 7-Oct-2010, he converted $65m of bonds into 500m shares (28.42%) of COMG. He deposited his shares with Tanrich Securities the next day.
In two equal tranches on 19-Jan-2011 and 21-Jan-2011, Mr Jiang disposed of $20.8m of bonds, and these were converted on 21-Jan-2011 and 24-Jan-2011 into 160m shares. One tranche was deposited with Tanrich Securities on 25-Jan-2011 and the other was deposited with Fulbright Securities Ltd (Fulbright) on 26-Jan-2011.
On 28-Jan-2011, he converted $13m bonds into 100m shares (4.94%), and these were deposited with Tanrich on 2-Feb-2011. He then held 600m shares (29.64%) of COMG, all via Tanrich.
On 28-Feb-2011, COMG announced that Mr Jiang had agreed with an unnamed placing agent to sell up to $238m of the bonds at an undisclosed price. A disclosure shows that the broker was Celestial Securities Ltd (Celestial). $135m of the bonds were sold by Celestial on 11-Mar-2011, converted on 14-Mar-2011 and deposited with Celestial on 31-May-2011. Another $33m were sold on 18-Mar-2011 and converted on 21-Mar-2011, and $36m were sold on 8-Apr-2011 and converted on 12-Apr-2011. These two blocks combined produced 530,769,229 shares which were deposited with Celestial on 5-Jul-2011. That makes a total of $204m of principal value. The remaining $34m went back to Mr Jiang on 12-Apr-2011.

Joseph Lau sells COMG stake

In the middle of all this, a disclosure of interest filed on 7-Mar-2011 states that Joseph Lau sold 269,986,900 COMG shares off and on the market that day, cutting his stake from 13.42% to 0.18% at an average $0.405, and he sold the rest of his shares the next day at an average $0.45. Total proceeds were about $111m. He stepped down as CEO on 6-Apr-2011 but remains an ED. The share priced reached a daily high for the year of $0.60 on 14-Mar-2011, and is down 82.8% since then, closing at $0.103 on Friday (9-Mar-2012). At its high, allowing for full conversion of the bonds, COMG was valued at HK$6,421m.

Share sales by Mr Jiang

On 21-Mar-2011, Mr Jiang disposed of 150m shares, settled the next day via Tanrich, when the stock moved to Goldman Sachs.
On 6-Apr-2011 he disposed of 230,769,230 shares (equivalent to $30m of bonds), settled that day via Tanrich. You can see that most of it moved to Celestial.

New directors at COMG

On 29-Mar-2011, Ms Hu Wei, the GM of Zhejiang Join-Home Media Co Ltd and a former reporter, was appointed as MD of COMG and Dr Gao Hong Xing was appointed as NED. On 6-Apr-2011, Sammy Tsui Wing Cheong (Sammy Tsui) a former COO of Sing Tao News Corp Ltd, was appointed as unpaid CEO of COMG. On 13-Apr-2011, Mr Zhu Defu, the GM and publisher of a weekly magazine called "Taobao Tianxia" and VP of Alibaba Group Holding Ltd (Alibaba Group), was appointed as an ED of COMG.

On 3-May-2011, Mr Jiang transferred HK$65m of bonds to Taobao Tianxia Media Co Ltd (Taobao Tianxia) for an undisclosed price. The bonds were immediately converted into 500m shares (11.91%) of COMG. Taobao Tianxia was 49% owned by Alibaba Group and 51% by Zhejiang Daily Media Holding Group Ltd (ZDM). Mr Jiang also granted Taobao Tianxia "priority" to purchase the rest of his bonds, although it appears that no further purchases were made.

On 6-May-2011, Mr Gao Hai Hao and Mr Wang Jiang, President and VP respectively of Zhejiang Daily Press Group Ltd, were appointed as Honorary Chairman (non-director) and an ED of COMG.

Taobao Tianxia's holding of 500m shares was diluted to 4.61% by the series of subsequent bond conversions, but it has failed to disclose any change in its interest. There was a 6 month lock-up agreement with Mr Jiang which expired in Oct-2011. As far as we can tell, the only block of shares deposited into CCASS that we cannot account for since Taobao Tianxia became a shareholder is 446m deposited with Bank of China (HK) Ltd on 21-Jun-2011, so that is probably theirs.

More sales by Mr Jiang

On 23-May-2011, Mr Jiang disposed of $120,126,244 of bonds, which were converted in two tranches. The first tranche of $52m were converted on 23-May-2011 into 400m shares, which were probably deposited in two lots: 200m with Tanrich on 27-May-2011 and 200m with Fulbright on 31-May-2011, mirroring the pattern of January. The second tranche of $68,126,244 were converted on 23-May-2011 into 524,048,033 shares and probably deposited into CCASS via BOCI Securities Ltd (BOCI) in 3 lots at a more leisurely pace of 9,615,384 on 22-Aug-2011, 431,880,341 on 12-Oct-2011 and 82,552,308 on 23-Nov-2011.
On 19-Jul-2011, he disposed of $234m of bonds which were converted the same day into 1,800m shares and deposited with Piper Jaffray Asia Securities Ltd (Piper Jaffray) on 21-Jul-2011. On 25-Jul-2011, Mr Jiang moved his entire holding of 219,230,770 shares (3.16%) from Tanrich to Piper Jaffray. However, some time between 19-Jul-2011 and 4-Aug-2011, his interest in shares (including via bonds) rebounded to where it had been before 19-Jul-2011, because there is a filing on 4-Aug-2011 showing the same opening balance. So there appears to be a missing disclosure. As a result of the share return, his actual shareholding increased from 3.16% to 25.81%.

The likely explanation for the rebound is that he had a best efforts placing agreement with Piper Jaffray for 1,800m shares, which failed to complete. He left the shares with Piper Jaffray when they returned to him.
On 4-Aug-2011, he disposed of another $114.4m of bonds which were converted into 880m shares on the same day. These were likely deposited with BOCI in 3 tranches on 9-Aug-2011 (780m), 10-Aug-2011 (50m) and 15-Sep-2011 (50m).
On 28-Sep-2011, COMG announced that Mr Jiang had sold 100m shares (1.28%) of COMG to Shanda Capital Ltd, 100% owned by Shanghai Shanda Networking Co Ltd, for an undisclosed price. The buyer is 70:30 owned by Mr Chen Tianqiao and Mr Chen Danian, the respective CEO and President of Shanda Interactive Entertainment Ltd.
On 25-Oct-2011 Mr Jiang disposed of $16,909,732 of bonds which were converted on the same day to 130,074,860 shares. However, they appeared to bounce back to him on or before 9-Nov-2011, because a filing on that date shows the same opening balance. So there appears to be a missing disclosure.
On 9-Nov-2011, COMG announced that Mr Jiang had sold 100m shares (1.26%) of COMG to Mandra Capital Ltd (Mandra), 100% owned by Mr Zhang Song Yi and his family, for an undisclosed price. Zhang Song Yi was billed by COMG as a director of Sina Corporation, but that's just one of his non-executive roles. Mandra was also involved in selling Mandra Forestry Holdings Ltd to the spectacular Sino-Forest Corporation.

On the same day, Mr Jiang sold 100m shares to other person(s), so his combined disposal was 200m shares. We can see 100m shares moving to HSBC Private Bank (Suisse) SA, probably for Mandra, on 9-Nov-2011, along with 1,000m shares moving from Piper Jaffray to Convoy Investment Services Ltd (Convoy), Mr Jiang's first deposit there. Then the next day we can see 100m shares leaving Piper Jaffray, mostly to Tanrich.
On 22-Nov-2011, Mr Jiang sold 43m shares. These were settled by Convoy 2 days later.
On 25-Nov-2011, 130,074,860 shares were deposited with Convoy, probably Mr Jiang's as they match the number mentioned above.
On 28-Nov-2011, he disposed of $122,982,575 of bonds which were immediately converted into 946,019,807 shares. These were deposited with Convoy on 2-Dec-2011.
On 7-Dec-2011, he sold 149m shares. These were settled by Convoy 2 days later.
On 12-Dec-2011, he converted the last bonds. On 13-Dec-2011, the remainder of the shares he kept at Piper Jaffray were moved to Convoy, and on 16-Dec-2011, he deposited with Convoy the shares from his final conversion.

In summary, the entire amount of convertible bonds generated 9,453m shares, enlarging the share capital of COMG by 750%. Mr Jiang kept about 3,001m shares (27.67%) of COMG and sold the other 6,452m, either as bonds or converted shares. In all of his statutory filings, he failed to disclose the price he received for any of the sales. We call on the SFC to investigate that.

Apart from the original 100m consideration shares, his disposals occurred between 19-Jan-2011 and 8-Dec-2011. During that period, total on-market turnover in the stock was $4,087m on 14,772m shares, so the volume-weighted average price or VWAP was $0.2767. So, in the absence of disclosure of the actual sale prices, our best estimate is that he grossed about $1,785m on the sales, plus $26.5m on the original 100m shares he received, for a total of about $1,812m. At Friday's (9-Mar-2012) closing price of $0.103, his remaining shares are worth about $309m, taking the total to $2,121m. And if it turns out that he didn't get full market price at the times when he disposed of his bonds and shares, then that begs the question who got the benefit of the discount.

Mr Jiang also goes by the name of "Howard" and is a director of a Cayman fund called China Angel Fund, of which he owns 36% at the last count. He owns 100% of China Angel Investment Management Ltd (BVI). Another entity called China Angel Fund Management Ltd (Cayman) manages the fund, which is advised by AM Capital Ltd.

Interim results

The latest interim report of COMG, for the 6 months to 31-Dec-2011, shows revenue of just HK$6.7m and a loss of $18.7m. Net assets are officially $1320m, but that includes goodwill on the acquisition of GMG Media of HK$1,252m. So net tangible assets are just HK$68m or about $0.006 per share, compared with Friday's market capitalisation of $1,117m. At 31-Dec-2011 COMG had just 36 employees, including directors. There were 7 executive directors so we assume there were just 29 others.

More media acquisitions?

For some time now, COMG has been in negotiations to buy 2 companies. Both appear to be related to the new directors' other businesses. The latest update was on 17-Jan-2012. The first target is Zhejiang Daily Join-Home Media Holding Group Ltd (ZDJM), incorporated in HK on 11-Apr-2007. They don't mention that this was known as Lightscape Technologies (Greater China) Ltd until 11-Mar-2011. It was spun out of a US Pink Sheets stock called Lightscape Technologies Inc on 31-Dec-2010. Meanwhile, a new company has been set up on 28-Jan-2011 and took on the name of Lightscape Technologies (Greater China) Ltd (Lightscape) on 24-Mar-2011. So don't be confused by the name-swapping: the business of ZDJM is new, not 5 years old.

According to the Lightscape web site, Sammy Tsui, the CEO of COMG, is also CEO of Lightscape, which designs and supplies outdoor LED displays and facade lighting. On the same site you can find a ZDJM inauguration ceremony on 31-Mar-2011.

According to an earlier announcement on 18-Oct-2011, ZDJMH is:

"currently engaging and operating the following businesses both in China and Hong Kong:- (1) "Tao" + "Taobao Tianxia" Magazine and its online shopping platform; (2) Iconhere interactive entertainment and information platform; (3) LED total solution and consultancy business; and (4) out-of-home media business, including large-scale outdoor LED screens and indoor LCD screens.

The second target is something called Dimension Digital Marketing Ltd (DDM), incorporated in HK on 29-Jul-2008, which from its web site appears to be developing some kind of QR-like barcode system for advertisers. DDM works out of the same office as Lightscape.

Shaanxi Northwest and Joseph Lau

On 22-Nov-2011, Shaanxi Northwest New Technology Industry Co Ltd (8258), a GEM-listed H-share, granted to Joseph Lau options to subscribe 46m new H-shares at $0.25 each, for an option price of just HK$180k. The "reasons" section contained the usual blather about "enhancing the capital base" without explaining why they wanted Joseph Lau to have rights over 16.67% of the enlarged H-shares (4.81% of the company), exhausting the General Issue Mandate. It is yet another demonstration of why companies should not have these mandates.

Conclusions and unfinished business

We'll bring this hexalogy to a close. We've given you enough reasons to avoid investing in all of the listed companies named at the top of this article, as well as any company which uses the same advisers, particularly on a regular basis. We've also laid out evidence surrounding a substantial number of dubious transactions that the SFC, ICAC or CCB should investigate, and we've drawn attention in the "regulatory notes" boxes to a number of deficiencies in HK's regulatory framework which facilitate some of these schemes.

Once in a while, the authorities do actually listen and act. Examples include our article Cooking with Gas (4-Apr-2004) which was eventually followed by an ICAC investigation and convictions in 2010, and a trilogy of articles about the Styland Network in 2002. Just last week, 10 years later, the SFC won a landmark ruling ordering the former Chairman and his wife (who was an executive director) to pay HK$85m in compensation (plus a lot of interest since 2000). The case was actually heard in Jan-2011 but it took 14 months for Justice Aarif Barma to issue his judgment, which says something about the strain the courts are under and the need to raise the budget for the judiciary. It will be interesting to see whether the couple pay up. The court has disqualified them as directors for 12 years, but their son is now CEO of Styland and they still own 22.72% of it. No criminal charges were brought against the couple.

Other series include the tetralogy of articles in 2009 on China Public Procurement Ltd (1094) and China Railway Logistics Ltd (8089), amongst others. No public action has been taken on those. There was also our articles on EganaGoldpfeil, after which the company collapsed. The SFC has commenced action against the directors seeking disqualification orders and HK$2.13bn of compensation, but no criminal charges have yet been brought despite an investigation by the Commercial Crime Bureau.

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Raking muck, Part 6 11 March 2012