Real Gold, XING, QXM and Prod-Art
20 June 2011
Real Gold Mining Ltd (RGM, 0246) admitted this morning that its controlling shareholder, Wu Ruilin (Mr Wu), who on the face of things has no official role in the group, had in fact remained as only director of Lita Investment Ltd (Lita), RGM's only direct subsidiary, and on behalf of Lita, he signed pledges over the entire issued share capital of its subsidiary Fubon Industrial (Huizhou) Co., Ltd (Fubon) in favour of Shanghai Pudong Development Bank, to secure loan facilities granted to private companies under Mr Wu's control.
The first pledge was signed on 27-Sep-2009 (7 months after RGM listed) for facilities of CNY100m for 2 of Mr Wu's private companies. That was released on the first anniversary. 10 days later, on 7-Oct-2010, the second pledge was signed for facilities of CNY240m for 4 of his private companies, and that pledge was only released on 16-Jun-2011 (last Thursday) after he was rumbled.
As shown in the diagram on page 104 of the IPO prospectus dated 10-Feb-2009, Lita owns Fubon, which owns Chifeng Fuqiao Mining Co Ltd (Chifeng Fuqiao), which owns the mining subsidiaries of the group. That structure hasn't changed much; in note 33 of RGM's 2010 annual report, Lita is the only directly-owned subsidiary. So Mr Wu had put essentially all the assets of RGM at risk to support financing for his private business. RGM says that its board of directors did not know that Mr Wu had signed these pledges until 13-Jun-2011, after enquiries were made by the SCMP, which broke the story on Friday 16-Jun-2011.
Mr Wu is not a director of RGM and is not listed as a senior executive in its annual report or the prospectus. However, that was not always the case. RGM was incorporated on 13-Mar-2008 and he was an Executive Director from then until 18-Dec-2008, less than 2 months before the IPO. We suspect this resignation was part of the listing approval process at the Stock Exchange, because after describing his other mining interests on page 178, it states on page 179:
"We are satisfied that our Company is capable of carrying on its business independently of Mr Wu."
Yet there are embarrassing remnants of his presence: particularly the Independent Technical Expert's Report, which carries the same date as the prospectus. There, on page V-62, it says:
"The Company's senior management team is headed by Mr. Wu Ruilin, founder and Chairman of the Board of Directors of the Company"
Oops! Maybe an expert should know, but this is somewhat contradicted by RGM's statement on page 115-116:
"Historically, the role of Mr Wu, our ultimate controlling shareholder, has been to assist in identifying and acquiring our initial strategic assets (i.e. our Gold Mines). However, since acquisition of our Gold Mines, Mr Wu has hired a team of professional management for our Group and hence has neither been involved in the daily development of our Gold Mines nor in the operations of our Group. Therefore, we have been operating independently from our controlling shareholder...."
"...Mr Wu's role in the future is expected to be limited to exerting influence on our Company at the shareholder level..."
But, on page 101, it says point blank, and without any suggestion that this might be inappropriate:
"Mr Wu is currently the sole director of Lita"
And finally, deep in the prospectus, Appendix VII-10 states that Mr Wu was then a director of Fubon, along with 2 other people who are not directors or senior managers of RGM. At the next level down, Mr Wu was also one of 4 directors of Chifeng Fuqiao (including 3 EDs of RGM) and he was its only legal representative. Finally down at the 3 mining subsidiaries, Mr Wu was the sole director of one of them, Luotuochang Mining, while Wang Zhentian, the Chairman of RGM, was the only director of the other two. At the AGM of RGM on 30-Apr-2009, 5 weeks after it listed, Mr Wang was voted out of office as a director. Mr Wu voted against his re-election. We don't know whether Mr Wang still sits on the subsidiary boards or who took over from him.
A listed company (RGM) putting a non-director in sole directorship of its only subsidiary (Lita) in itself shows a severe weakness of internal controls. The annual report says (p37):
"The Board is responsible for implementing and maintaining the Group's internal control system and reviewing its effectiveness. During the year ended 31 December 2010, they have carried out a review of the implemented system and procedures, including areas covering financial, operational and legal compliance controls and risk management functions. The Board considered that, for the year ended 31 December 2010, the Company's internal control system is adequate and effective..."
Yeah, right. One of the most basic questions in any internal control review would be "do we have control over our subsidiaries?". Another would be "can any single person cause harm?". RGM now says that after the Feb-2009 IPO, it hired an "independent internal control consulting firm" to conduct an annual review of the internal controls. RGM should name that firm and explain why it considered it appropriate for any subsidiary to have only one director, and why it considered it appropriate for Mr Wu to have any directorships in the group at all. RGM says that Mr Wu resigned from Lita on Thursday "and from positions in other companies in the Group".
Rather conveniently, RGM has obtained a legal opinion from Commerce & Finance Law Offices dated 19-Jun-2011 (Sunday) that the pledges were "invalid", although it does not say on what basis. RGM should explain why the pledges were invalid. That may get them out of potential legal trouble, because page 12 of the annual report states:
"Pledge of assets: there were no significant charges on group assets at 31 December 2010 and 31 December 2009."
It is an offence under Section 298 of the Securities and Futures Ordinance knowingly or recklessly to make a false or misleading statement inducing transactions. If the pledges were valid, then that statement would be false. If investors had known that the group's assets had been pledged, they might not have paid the prices they did for the stock.
Mr Wu's other listings
Mr Wu apparently got into mining relatively late in life. Through companies he controlled, he bought the first of the 3 mining companies which were floated in RGM on 30-Oct-2006 and the last on 25-May-2007 before RGM's listing on 23-Feb-2009. The total acquisition price of the 3 companies, all from independent third parties, was CNY205m.
Before that, Mr Wu's original business was making corded telephone handsets, a business he established in 1992. This was listed on Nasdaq on 16-Feb-1999 as Qiao Xing Universal Telephone Inc and renamed on 28-Jan-2010 as Qiao Xing Universal Resources, Inc (Nasdaq: XING), after it acquired China Luxuriance Jade Co Ltd (China Luxuriance) from Mr Wu. China Luxuriance owns "the right to receive the expected residual returns" from Chifeng Haozhou Mining Co., Ltd, a start-up copper-molybdenum mining company. XING paid Mr Wu USD110m for this, of which USD30m was cash and the rest in shares at USD2 each.
Mr Wu is Chairman and CEO of XING and his son, Wu Zhi Yang, is Vice Chairman. On 2-May-2007 XING spun off its mobile phone business into a NYSE-listed subsidiary, Qiao Xing Mobile Communication Co. Ltd. (NYSE: QXM) of which Mr Wu is Vice Chairman and his son is Chairman. Given that he was pledging the assets of RGM, investors in XING and QXM might wonder whether their assets have also been put at risk to support Mr Wu's private business.
Mr Wu and Prod-Art
Mr Wu has an earlier appearance in the HK market: on 17-Jun-1998, SEEC Media Group Ltd (then Prod-Art Technology Holdings Ltd, Prod-Art, 0205) then a struggling electronics maker, bought 28.84% of Wu Holdings Ltd (Wu Holdings, BVI) for HK$40m, presumably from Mr Wu. Wu Holdings in turn controlled XING. That deal was a few months before XING was listed on Nasdaq. Mr Wu became an Executive Director of Prod-Art on 26-Aug-1999.
On 31-Dec-2001, Prod-Art (by then named Sino Infotech Holdings Ltd) agreed to sell its stake in Wu Holdings for HK$40.04m (in 3 instalments) to Mr Wu's family trust, which already owned the remaining 71.16%. This was a connected transaction duly approved by minority shareholders, at a $24.4m discount to Prod-Art's attributable share of the net assets at 31-Dec-2001, resulting in an impairment charge of the same amount. We are putting the circular online for readers' interest. The final instalment for the sale was due by 31-Oct-2002. Mr Wu resigned from Prod-Art on 13-Dec-2002, but notes 28 and 38(a) of the 2002 annual report reveal that he had only paid $18.42m by 31-Dec-2002 and it was not until 9-Apr-2003 that the sale was actually completed.
But the Prod-Art story doesn't end there. On 3-Mar-2003, Prod-Art agreed to sell its original business, Prod-Art Co Ltd (HK), to a company called Ankson Ltd (Ankson) for HK$19m. That was a P/E of about 2 times its net profit of $8.9m in 2002. The deal completed on 30-Jun-2003. Ankson, incorporated in the BVI on 10-Apr-2002, was described as "independent", and its owner was not disclosed. If it was Mr Wu, then as a director within the previous 12 months, he was a connected person of Prod-Art and it would have been a connected transaction. But of course, we have no knowledge of who owned Ankson.
But wait! Fast forward seven years to the RGM prospectus of 10-Feb-2009, and you will find that Ankson (with the same BVI incorporation date) was then wholly-owned by Mr Wu. According to page 101 of the prospectus, Fubon was established on 23-Jun-2006 (when Fubon was known as "Huizhou Ankson Plastic Moulding Technology Co Ltd") and was then 90% owned by Ankson, and Mr Wu acquired Ankson on 23-Apr-2007 - from whom it does not say. It seems like an amazing coincidence - how did Ankson, the independent company which bought Prod-Art's main subsidiary, end up being owned by Mr Wu?
© Webb-site.com, 2011
Organisations in this story
- Qiao Xing Mobile Communication Co. Ltd.
- Qiao Xing Universal Resources, Inc.
- REAL GOLD MINING LIMITED
- SEEC MEDIA GROUP LIMITED
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