There's a bubble in Thinsoft (8096), suspended with a market value of HK$1,604m and net assets of $33m. Over 95% of the company is in the custody of 2 brokers. We also discuss the archaic practice of parallel trading, which was to have been abolished in 2008. HKEx appears to have given up on that.

Thinsoft's thin ice
11 December 2009

There's a remarkable bubble in shares of software firm Thinsoft (Holdings) Inc (Thinsoft, 8096), so lets remark on it. Thinsoft was suspended at $0.64 at 11:44 yesterday (after rising 25.49% on the day), pending an announcement of an MoU for a possible acquisition. Even before that, it was a bubble stock. Thinsoft's stock may be temporarily frozen, but it is skating on thin ice.

The latest report for the quarter ended 30-Sep-09 shows net assets of just HK$33.64m (about $0.0134 per share, split-adjusted). It booked a loss of $1.4m on turnover of $2.3m. Despite this, at the suspended price of $0.64, it has a market value of $1,604m (US$205m), or about 48 times net assets. Is a back-door listing opportunity really worth that much?

Thinsoft was listed on 27-Feb-02 after a placing of 25% of the company at a split-adjusted $0.08 per share. The joint lead manager was Luen Fat Securities Co Ltd (Luen Fat).

On 7-Mar-07, the software company invested US$1m of its cash into shares of Vietnam Emerging Market Fund Ltd (Cayman) managed by Vietnam Asset Management Ltd, because that's what HK-listed companies with too much cash on their hands do, rather than return it to investors and let them make their own investment decisions.

On 20-May-08, Inno Smart Group Ltd (Inno Smart) agreed to buy 74.81% of Thinsoft for HK$86.25m or $0.046 per share (split-adjusted) from IPC Corporation Ltd, listed in Singapore. Inno Smart is owned as to 50% by Dennis Yu Won Kong (Mr Yu) and 50% by Yue Wai Keung (Mr Yue). Mr Yue is Chairman of Luen Fat.

Inno Smart's purchase triggered a general offer via Kingson Securities Ltd (Kingston), which closed on 11-Aug-08 with no acceptances. Before the offer, Mr Yu owned 2.88% and Mr Yue's mother and sister owned 3.61% between them, taking the total concert party to 81.30%, so in a placing on 19-Nov-08 at $0.10 (split-adjusted), Mr Yu sold 2.75% and Mr Yue's mother and sister sold all their shares via Luen Fat to restore the public float to 25.06%. Our CCASS Analysis shows that on settlement day, about 1.2% moved to Kingston, but the rest remained in custody of Luen Fat.

On 21-Aug-08, Mr Yu was appointed as Chairman and Mr Yue as Executive Director of Thinsoft.

On 1-Dec-08, Thinsoft lent HK$5.5m to toymaker-turned-coal-play Kiu Hung Energy Holdings Ltd (Kiu Hung, 0381) for a year at 11%. Mr Yu owned 11.96% of Kiu Hung and had an interest in convertible bonds of Kiu Hung. He became an ED of Kiu Hung on 22-Oct-09. Mr Yue also owned 4.49% of Kiu Hung. Mr Lam Kit Sun, an NED of Thinsoft since 11-Aug-08, was appointed as ED of Kiu Hung on 27-Oct-09.

Mr Yu has appeared in our stories before - he was a director and Chief Operations Officer of NASDAQ-traded China Energy Savings Technology Inc., which we wrote about in our article Golden Resorts and CESV on 8-May-05. He resigned on 1-Jul-05. On 4-Dec-06 the US SEC filed fraud charges against CESV and others (but not Mr Yu), alleging that they orchestrated an elaborate stock manipulation scheme.

There are no other shareholders over 5%, but CCASS records show that 95.22% of the company is in the custody of just two brokers: Kingston (76.20%) and Luen Fat (19.02%). The SFC should investigate the concentration of ownership in this stock.

Note that a 5:1 stock split took effect on 5-Nov-09 and there was parallel trading (under two different stock codes) from 5-Nov-09 to 19-Nov-09, which explains the gap in our history. Which reminds us of an outstanding problem at HKEx:

Policy issue: parallel trading is an archaic practice which dates back to the days of physical delivery in the years B.C. (Before CCASS). CCASS was born in 1993. Since then, in the years A.D. (After Dematerialisation), we all settle electronically by book-entry in the CCASS system, where nearly all publicly-held shares are deposited. On 22-Apr-08 HKEx announced that it would abolish parallel trading on 3-Nov-08. On 23-Jul-08 HKEx said there was "market-wide support" for the abolition, but some brokers needed more time to make the necessary operational and system changes. HKEx said it would publish a document later in 2008 and announce a revised implementation timetable in early 2009, but did neither. Parallel trading continues to create confusion and fragment liquidity: for several days, you can trade the same stock on two different counters (CCASS allows fungibility for settlement) and there is no definitive market price. Why are we still waiting for this simple modernisation?

©, 2009

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