Webb-site Reports

Webb-site can reveal another SFC investigation underway involving dealings in Pak Wing (8316). The manipulation of this GEM bubble reveals another connection between China Huarong (2799) and what we call the "Chung Nam Network". The more we scrutinise Huarong, the worse it looks. Will the State end up bailing out the bailer?

Huarong and the Chung Nam Network
3 October 2018

In a pair of Gazette Notices published on Friday 28-Sep-2018 (but dated 17-Sep-2018), the SFC ordered 2 brokers to take action against an unnamed male "Client". One broker, Zhongtai International Securities Ltd (Zhongtai), was ordered to freeze HK$2.9m of assets in the Client's account. At 31-Aug-2018, he had more than that, some HK$1.97m of cash and $10.15m of shares at Zhongtai. The other broker, Get Nice Securities Ltd (Get Nice), was prohibited from accepting any last-minute buy orders for the shares of a listed company from 15:59-16:00. This may seem like small beer, but bear with us and you will see why it is important.

In its reasons, the SFC states that the daily closing share price of "a certain listed corporation" increased 64.2% from $1.34 on 25-May-2018 to $2.20 on 1-Jun-2018. Webb-site can reveal that the only company that fits this description is Pak Wing Group (Holdings) Ltd (PW, 8316).

PW is a loss-making construction foundation sub-contracter, listed on GEM on 10-Aug-2015 following a placing of 200m shares (25%) at $0.35 in which the top 10 placees received 96.13% of the placing shares or 24.03% of the company. The 2 co-founders retained 75% (37.5% each). The concentrated stock took off and reached a daily closing high of $7.75 on 5-Feb-2016, briefly valuing the firm at HK$6.2bn or about 94x then net assets.

On 22-Aug-2016, a year and 12 days after listing, the founders borrowed against their shares from Imperium Credit Ltd, a money-lender owned by Mr Cheng Ting Kong, who is also the Chairman of Sun International Group Ltd (8029) and Imperium Group Global Holdings Ltd (0776). On 6-Mar-2017 the pair sold their 75% stake to then-27-year-old Mr Zhang Weijie (Mr Zhang) for HK$0.50 per share or $300m in total, triggering a general offer made and financed by Freeman Securities Ltd (FS) on his behalf. Despite being at a substantial discount to the inflated market price, there were acceptances, raising Mr Zhang's stake to 84.32% on 19-May-2017 when the offer closed.

On 10-Jul-2017, FS then arranged a placing of the 74.52m excess shares at $0.50 (the same as the takeover price) to purportedly restore the free float to 25%. We can see in our CCASS system that the shares moved on the settlement date from FS to Win Wind Securities Ltd (WW). We pause to note that FS is owned by Freeman Fintech Corp Ltd (0279) and WW is owned by Enerchina Holdings Ltd (0662). Both are in what we call the "Chung Nam Network" that we have covered extensively over the years. Avoid them.

Huarong, again

Now here's where we circle back to Monday's story, on massive state-controlled China Huarong Asset Management Co Ltd (Huarong, 2799), the bad-debt manager, or possible the bad debt-manager. The more we scrutinise Huarong, the worse it looks. Ironically for a company that was originally set up by the State to bail out a State-owned bank before listing, it now looks possible that the State will end up having to bail out Huarong too, or otherwise trigger a cascade of losses at the other (state-owned) entities which have lent to Huarong.

You will recall that Mr Yang Zhihui, missing Chairman of Landing International Development Ltd (Landing, 0582, which should perhaps be renamed "Crash Landing") is suspected by the SFC of causing HK$10.17bn of losses to Huarong in "2 suspicious transactions stemming from a loan facility indirectly granted" to him by Huarong. The SFC didn't explain what they mean by "indirectly granted", but we do know that his 50.48% stake in Landing is frozen and held via Satinu Markets Ltd (Satinu), another member of the Chung Nam Network. He has probably borrowed against the stake, perhaps indirectly from Huarong.

On 30-Aug-2017, PW announced that Mr Zhang had pledged 67% of PW as security for a loan. They didn't name the lender, but a disclosure of interest shows that it is China Huarong Macau (HK) Investment Holdings Ltd. That entity is a HK company wholly-owned by a Macau company (hence the confusing name), which in turn is 51% owned by Huarong.

The Macau entity, China Huarong (Macau) International Company Limited (Huarong Macau), commenced business on 28-Dec-2016, launched with much Belt-and-Road fanfare, with Mr Lai Xiaomin, then Chairman of Huarong, presiding at the opening ceremony. Huarong Macau has 3 other obscure shareholders. 4 months later, Lai Xiaomin resigned to be investigated for alleged corruption. We note that the Deputy General Manager of Huarong Macau from Dec-2016 to Apr-2017 was Mr Lai Jinyu. He was an ED of fellow subsidiary Huarong International Financial Holdings Ltd (0993) where he was promoted to CEO on 13-Apr-2017, resigning on 11-Apr-2018 "due to work rearrangement". That was 6 days before Lai Xiaomin resigned. We wonder where they are now.

The pump and dump in PW

Now, back to the Gazette Notices. We don't know who the Client is, but the SFC says that he was the "dominant buyer" of PW shares, buying 84.2% of the volume in the 5-day period from 28-May-2018 to 1-Jun-2018, when the price ramped up. In fact the volume over that period was only 380,000 shares (0.0475%), so we can infer that he bought 320,000 shares and indeed this matches the increase in the CCASS account of Zhongtai over the settlement period.

The SFC states that in the prior week, on 23-May and 24-May, the Client "acquired over 30 million Listco shares" at an average of $0.52. We can see that in an off-market transaction on 23-May settled on 25-May, Freeman's custody balance dropped 41.09m shares, of which 26.09m went to Get Nice and 15m to another broker, CIS Securities Asset Management Ltd, formerly known as "Convoy Investment Services Ltd" (yes, them). We presume that was for a different buyer. Then the next day, Zhongtai's balance increased 4.10m, against in sales via Freeman, this time on-market. So that makes 30.19m PW shares transferred to Zhongtai in the 2-day period, consistent with the SFC's statement.

Finally, the SFC states that from 4-Jun to 6-Jun, the Client sold "over 4 million shares" through the two brokers, at an average price of $2.11, making a profit of about HK$2.9m. After closing at $2.46 on 4-Jun, the stock slid to $1.15 on 6-Jun, below the $1.34 price at which the Client allegedly began ramping the stock.

What goes around...

Now remember Mr Zhang's post-takeover placing at $0.50 to cut his holding to 75%, via Freeman to clients of WW? We've tracked those shares, and can see that there were small, normal on-market sales up to 28-Sep-2017, reducing the total at WW from 74.52m shares to 63.66m shares. After that, there were a number of off-market movements from WW to Satinu, with 5.502m shares moving on 19-Oct-2017, then 7.452m (exactly 10% of the placed shares) moving the next day, 6.532m moving on 11-Apr-2018, and 5.102m moving on 16-May-2018. On 23-May-2018, 7.452m shares were removed from Satinu and withdrawn from CCASS. The net result was 7.452m shares outside CCASS, 17.136m at Satinu and 39.072m still at WW, totalling 63.66m shares.

Why does this matter? Because acording to a disclosure of interest, on 7-Jun-2018 (the day after the Client allegedly dumped shares), Freeman bought 63.66m shares (7.95% of PW) for cash at $1.25 per share, 2.5 times the original placing price, and we can see that these shares were transferred in CCASS to FS on the same day from WW, Satinu, WW and back into CCASS. The numbers match perfectly.

The Freeman purchase values all 800m shares of PW at exactly HK$1bn, which is about HK$1bn more than the net assets of PW - yes, in the quarterly report at 30-Jun-2018, it had negative net assets of -HK$0.71m, and is being kept solvent only by loans from its past and present directors.

The share price closed at $0.95 on 2-Oct-2018, which still values PW at HK$760m. We wonder how much Huarong Macau has lent Mr Zhang against the stock, and who were the placees that were lucky enough to benefit from a 150% gain at the expense of Freeman's long-suffering shareholders?

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Huarong and the Chung Nam Network 3 October 2018