An HKEX decision last week led us to discover an inflated acquisition that looks like a cash extraction exercise, possibly to cover an earlier outlay of "earnest money". A sudden surge in profits of the acquired consultancy coincides with a Chinese takeover of troubled soccer team A.C. Milan, or Rossonori, which prints more red ink than black, and a deeply-subordinated loan to its Chairman.

Questions on Teamway (1239) and a bit of soccer
22 October 2017

A recently-published HKEX Listing Decision (LD) caught our eye last week. As usual, the exchange anonymised it, but we've decoded most of it, so now we're going to take you on a journey through some rather dubious transactions, and just like any news media, there's a bit of sport at the end.

The LD case concerns an unsuccessful attempt by Teamway International Group Holdings Ltd (Teamway, 1239, formerly Jin Bao Bao Holdings Ltd) to dispose of its original packaging business and embark on a flimsy new consulting business while retaining its listing. However, the LD is more notable for what it missed, as we reveal below. Teamway is known as "Company A" in the LD.

Teamway was listed on 18-Nov-2011 as a packaging products business. On 10-Nov-2016, Teamway announced the acquisition of Treasure Found Investments Ltd (TFI, BVI) for HK$250m in cash. TFI owns PV Advisory Services Ltd (PVAS). The deal completed 4 days later. In the LD, TFI is known as "Subsidiary B". The announcement named the vendor as Shining Praise Ltd (BVI), the owner of which was not disclosed. However, the LD is more direct, stating that Subsidiary B was acquired from "Mr C", who is a director of Subsidiary B. HKEX says that Subsidiary B "relies heavily on Mr C to source its clients and business". If you know who Mr C is, please tell us. Teamway's 2016 annual report does not name any senior management.

According to the annual return at the HK Companies Registry, PVAS had only 1 director at 28-Jul-2017, Mr Chan Ka Wing. Incidentally, he became an ED of Dongwu Cement International Ltd (0695) on 1-Sep-2017.

According to the acquisition announcement, TFI/PVAS was involved in "provision of consultancy and strategic services in relation to financial planning, accounting, valuation and company secretarial". It had a net loss before and after tax of HK$2.7m in 2014 and HK$1.3m in 2015. No figures for turnover were given. Miraculously, it's net profit for the 10 months to 31-Oct-2016 had improved to HK$14.4m while the unaudited net assets were said to be HK$115.2m at 31-Oct-2016.

This net asset figure is hard to believe when you look at the position 2 weeks later, on completion of the acquistion. In note 30 of the annual accounts at 31-Dec-2016, Teamway shows that it acquired net assets (mostly bank balances) of just CNY14.05m (HK$15.92m), or about HK$100m less than Teamway claimed existed at the end of October. In short, it appears that the announcement was false and misleading. We call on the SFC to investigate that.

The deal was purportedly protected by a profit guarantee of HK$30m for 2017, with the vendor promising to repay 8.3333 times any shortfall (up to the full HK$250m), but the vendor is just a BVI company, so if it had already disbursed the proceeds, the guarantee would be worthless, as there was no escrow or security disclosed.

The acquisition of TFI was treated by Teamway as a "Discloseable Transaction" under the Listing Rules, so no accountants' report was provided and no shareholders' approval was needed. However, the consideration of HK$250m was 47.0% of Teamway's total assets of CNY456.6m (HK$532.1m) at 30-Jun-2016, or 97.7% of its net assets of CNY219.6m (HK$255.9m).

This highlights a huge gap in the Listing Rules: there is no test of the amount paid relative to the buyer's assets or net assets. Instead, under Listing Rule 14.09, when buying "equity capital" (shares in another company) the "assets test" looks at the total assets attributable to the equity. In this case, that was the total assets of PVAS, which were minimal. The rule should be amended to use as the numerator the greater of the price paid and the attributable assets, because implicitly, the price paid shouldn't be more than the assets are worth to the buyer.

What the regulators missed

Here's what the regulators missed. The announcement didn't mention that the key subsidiary, PVAS, is a HK company which changed its name on 18-Oct-2016, just 3 weeks before the deal. Prior to that, it was named "Pacific Vision Advisory Services Limited". PVAS was a 100% subsidiary of Pacific Plywood Holdings Ltd (PP, 0767) until some time after 30-Jun-2016. In its 2016 interim report, PP stated that PVAS recorded revenue of just HK$350k and a loss of HK$1.353m in the half year, and:

 "As this business has underperformed and recorded continuous losses for the past years, the Group realised this business by selling [PVAS] subsequently after 30 June 2016".

That sale was too small to be announced, but we can tell you what PP got for it. Look at note 28 of the 2016 annual accounts of PP, on disposal of subsidiaries. They do not state the names of subsidiaries sold, but during the year, based on the subsidiary list in note 1, we can see that they sold only 2 subsidiaries - a forestry business, and PVAS. The combined proceeds were HK$24.5m, generating a gain of HK$16.201m.

Note 18 of the PP interim report states that during the first half, they sold the forestry business for HK$10m, that it had net liabilities of $1.425m, and therefore the gain on that was $11.425m. So we can subtract that from the full-year figures. So we infer that PVAS was sold for HK$14.5m, and generated a gain of $4.776m, implying net assets of $9.724m. PP did not book any revenue from PVAS in the second half of the year before selling it.

So PP apparently received HK$14.5m for a loss-making secretarial firm with year-to-date revenue of $0.35m and net assets of $9.724m, and less than 5 months later, it was sold to Teamway for $250m in cash.

The LD states that from July 2016 to April 2017, the revenue of Subsidary B (PVAS) shot up to HK$230m. However, only 2% was from recurring corporate secretarial services, with the remaining 98% generated from mostly non-recurring business. Of the $230m, 70% was derived from just 1 transaction with 1 client, whilst 10% came from the second-largest client. The 2016 annual accounts of Teamway, note 5, shows that in the final 47 days of 2016 since the deal completed, PVAS generated revenue of CNY145.449m (HK$164.8m), of which CNY140.024m (96.3%) came from a single customer.

For SFC investigation

Given the lack of substance and poor prospects of PVAS right up until it was sold by PP, it seems highly likely that Teamway paid a deliberately-inflated price for TFI and PVAS so that it could extract value from the company. The SFC should investigate this transaction.

The story goes back further than that though. On 21-Jan-2015, Teamway announced that Liu Liangjian (Mr Liu), via his wholly-owned company, had bought 75% of Teamway from its founders for HK$560m. That triggered a general offer backed by Kingston Securities Ltd (Kingston), but the stock was in a bubble, so the offer price was a 60.69% discount to the previous closing price and there were almost no acceptances when the offer closed on 4-Mar-2015. As usual, all the "independent" directors were immediately replaced along with the new executive directors, including Mr Liu. The offer valued Teamway at a shell premium of about HK$479m above net assets, not unusual in HK.

Just 27 days later, on 31-Mar-2015, Teamway announced that it had paid out HK$200m of cash as refundable "earnest money" for a possible acquisition of an enormous property project on 1.75 sq. km. of land in Anhui Province. The advance was secured on shares of the BVI target, Golden Phone Investments Ltd (GP). At that point, the target company apparently didn't own the project company - all that was said was that GP "will be interested" in it, so that was somewhat shakey collateral. There was also a guarantee from a private PRC company, GooCoo Investment Ltd, said to be owned by Yuan Qihong (Mr Yuan) and his spouse. The ultimate vendors of GP would be Mr Yuan (45%) and Ms Hu Yulan (55%). It is unclear whether she was his spouse. Teamway's 2015 interim report shows that it had borrowed HK$200m (then CNY158.7m) at 10% p.a. from a non-bank entity in the same period, secured on the shares of an unspecified subsidiary, presumably to fund the earnest money.

On 31-Mar-2016, Teamway announced that the MoU signed a year earlier to buy GP had lapsed and that the HK$200m of earnest money (minus expenses) was repayable within 1 month. However, the interim report at 30-Jun-2016 shows that "Prepayments, deposits and other receivables", which at the prior year-end included the earnest money, had not declined but had increased from CNY175.1m to CNY187.5m. It appears that the earnest money had not been refunded on schedule.

It was perhaps only because of the acquisition of TFI at an inflated price of HK$250m on 14-Nov-2016 that Teamway was able to get the HK$200m receivable earnest money off its balance sheet. The 2016 annual accounts state that it was full refunded during the year.

Mr Liu exits

Between Dec-2015 and Jun-2016, Mr Liu sold all his Teamway shares as follows:

Mr Ling became Chairman of Teamway on 27-Sep-2016, replacing Ms Xie.

The Listing Decision

On 19-Apr-2017, Teamway announced the proposed sale of its original packaging business for HK$250m. The purchaser was Billion Grand Investments Ltd (BVI), owned by one Mr Li Zhi, said to be an independent third party. In the LD, HKEX concluded that under Listing Rule 13.24, this transaction would leave Teamway with insufficient operations or assets (PVAS) to warrant the continued listing of Teamway. That decision was announced by Teamway on 9-Jun-2017. On 16-Jun-2017, Teamway filed an appeal to the Listing Committee, but on 28-Jun-2017, Teamway decided to withdraw its appeal.

On 7-Jul-2017, Mr Huang sold his stake for HK$0.067 per share to one Cao Longbing, apparently having lost 77.7% of his investment.

On 31-Jul-2017, Teamway announced that the "conditions precedent" for the disposal had not been fulfilled and the disposal would lapse.

On 11-Aug-2017, there was a mass board change in which Ms Xie resigned as ED, two so-called INEDs resigned "due to their other business commitments", and 2 more were appointed. Don't worry about Ms Xie though: on 10-Oct-2017 she was appointed as Chairman and CEO of China Environmental Energy Investment Ltd (CEEI, 0986), a member of the Enigma Network, apparently without needing to agree on any salary. CEEI says she has no shareholding or relationship with any shareholders or directors in that company. She replaces Ms Chen Tong, who resigned following the Listing Committee's "criticism" of her on 29-Sep-2017. 

Investment property

Incidentally, on 13-May-2016, Teamway announced the acquisition of Gorgeous Assets Ltd (GA, BVI), the only asset of which was a residential flat of 1568 gross sq. ft. at One Silversea, Kowloon. The exact address of the flat was not disclosed, nor is it included in the 2016 annual report, when it was held as an investment property. That's a breach of the Listing Rules, Appendix 16 paragraph 23(2)(a), which was remedied on Friday (20-Oct-2017) following a complaint by Webb-site to HKEX. It is Flat A on 21/F of Tower 1, and was still vacant at the end of 2016.

GA had only been incorporated on 1-Dec-2015, so it must have acquired the flat since then, which suggests that 15% Buyer's Stamp Duty and 8.5% Double Stamp Duty was payable, as a company is not a permanent resident of HK. According to Centadata, the flat was bought on 20-Apr-2016 for HK$45m, 23 days before GA was sold to Teamway. It would be interesting to know whether the $10.575m of stamp duty was paid before Teamway bought GA, or whether Teamway had to fund it. Teamway paid for GA by issuing 200m shares, purportedly at $0.30 each, although the market price was $0.223, so they were only worth HK$44.6m at market price. The vendor was Winning Global Holdings Ltd (BVI), the owner of which was not disclosed. The shares were issued on 20-May-2016. On 9-Mar-2017, they were deposited into CCASS via Huarong.

Update: from the 2015 accounts of China Healthcare Enterprise Group Ltd (CHE, 1143) we see that GA was an inactive 100% subsidiary at 31-Dec-2015. The 2016 accounts show that during the year, the group acquired a property for HK$55.575m including transaction cost. That must be the apartment for $45m+23.5% stamp duty. It recognised a "fair value loss" of $18.345m on the property and then booked a gain on disposal of the subsidiary of $6.356m, for an overall loss of $11.989m. At 31-Dec-2016, CHE still held the 200m shares of Teamway it received as consideration, which by then had dropped in value from $43.6m to $18.0m.

AC Milan

And now, something for our soccer fans, or people who take vicarious enjoyment in watching others kick a ball around.

Teamway's interim report at 30-Jun-2017 shows a spike in cash accompanied in note 16 by a new unsecured US$20m (CNY169.308m) loan from a non-bank lender at 10% p.a. due in 2020.

On or before 28-Aug-2017 Teamway started money-lending. It announced a US$8.3m loan facility at 14% p.a. to Rossoneri Sport Investment Co., Ltd (RSI, HK), which was said to be "principally engaged in investment in sports related business". RSI is owned by Rossoneri Advance Co., Ltd (RAC, BVI), which is owned by Li Yong Hong (Mr Li). He has pledged the shares of RAC (but not RSI) as security for the loan.

What the announcement didn't say: Rossoneri is Italian for "red black", after the colours of loss-making soccer team A.C. Milan, owned by Associazione Calcio Milan S.p.A., 99.93% of which was acquired by Rossoneri Sport Investment Luxembourg S.a.r.l. (RSIL) for EUR740m (including debt of EUR220m) on 13-Apr-2017, from Silvio Berlusconni's Fininvest. The deal was originally announced back on 5-Aug-2016 and later restructured after China tightened outbound capital controls, preventing the original mainland company from participating. Hedge fund billionaire and soccer fan Paul Elliott Singer's Elliott Management reportedly helped bridge the gap with loans to the buyer and subscriptions of bonds in A.C. Milan itself. Let's hope he hasn't let love of the game distort rational investing, because he may be about to own a team that prints more red than black ink.

Luxembourg filings (which unlike HK's, are available for free online) show that RSIL has 2 classes of shares. 11,999 A-shares, giving essentially all the equity rights, are held by Rossoneri Champion Investment Luxembourg S.a.r.l. (RCIL), which in turn is 100% owned by RSI. A single B-share is held by Project Redblack S.a.r.l. (PB), which in turn has 3 classes of shares and appears to be the debt-financing vehicle. 2 of these classes are held by Blue Skye Financial Partners S.a.r.l., which is equally owned by the 2 co-founders of Blue Skye Investments. The other 2 are owned by Delaware LLCs which may be related to Mr Singer.

PB nominates 2 of the 5 directors of RSIL and certain decisions require the B-directors' approval, such as selling any shares in A.C. Milan or pledging them. New A-shares can be created without the B-directors' approval, provided they are pledged to PB, suggesting that the existing A-shares are already pledged by RCIL to PB. Teamway is a very subordinated creditor lending 3 layers behind AC Milan and secured on the 4th layer - so it will probably get nothing if the buyout defaults, and the fact that Mr Li is borrowing at this level should be reason enough for alarm.

Mr Li is now Chairman of A.C. Milan. We can't help wondering whether the sudden surge in revenues and profits of PVAS is in any way related to the A.C. Milan acquisition. The amount of the loan facility is similar to the entire profits from PVAS so far.

©, 2017

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