Webb-site has deduced that these are assets of Mr Yang Zhihui, missing Chairman and majority shareholder of Landing (0582), and that he is reasonably suspected of fraud causing losses of HK$10.17bn to China Huarong (2799), the ex-Chairman of which is under a corruption investigation in China. We also turn the spotlight on China Goldjoy (1282) which was an enthusiastic buyer of Landing at prices far higher than its Chairman paid beforehand.

Breaking: SFC freezes up to HK$10.17bn of assets in 3 brokers
1 October 2018

In a set of Gazette Notices published on Friday (28-Sep-2018) but dated 17-Sep-2018, the SFC has ordered 3 brokers to freeze assets of a male individual (referred to only as "the Person") up to an amount of HK$10,168,752,898 (about US$1.3bn) which, based on our records, is the largest ever such order. The SFC has not yet made any announcement of the action.

The SFC states that according to "current findings from our investigation", it suspects that the Person "orchestrated fraudulent schemes by colluding with certain personnel of the management of a listed company and/or its subsidiaries (the Group) in 2 suspicious transactions stemming from a loan facility indirectly granted to the Person by the listed company". It reasonably suspects that:

  1. "the Person might have colluded with persons within the management of the Group to engage in a scheme to defraud the Group by procuring the listed company’s subsidiary to purchase from the Person’s wholly owned company, shares of another listed company on terms which were unfavourable to the purchaser and inconsistent with the purported underlying purpose of the transaction...the true purpose was to enable the Person to profit from the transaction at the expense of the Group"; and
  2. "the Person colluded with persons within the management of the Group to enable him to sell, via his wholly owned company, a substantial interest in another non-listed company to certain funds subscribed by the Group at a significant overvalue, defrauding the Group to make significant profits for himself to the detriment of the Group.

The SFC states that "the Group through these suspicious acquisitions might have suffered aggregate losses of approximately HK$10.17 billion". The Person has securities and cash at the 3 brokers of HK$4.64bn, some way short of that amount. A further clue to the Person's identity is given:

"The Person is the Chairman of a listed company. The company purportedly lost contact with the Person and recent news reports appear to indicate that the Person might be abroad or under investigation in the PRC as a suspect in a corruption case."

Mr Yang and Huarong

The SFC's notice, together with other public data, gives Webb-site enough to deduce that the Person is Yang Zhihui (Mr Yang), the Chairman and (for now) controlling shareholder of casino operator Landing International Development Ltd (Landing, 0582), which has a casino on the South Korean island of Jeju, and is/was hoping to build one in the Philippines.

On 23-Aug-2018, Landing announced that it had been "unable to contact or reach" Mr Yang. The next day, mainland financial site Caixin reported that he had been detained on arrival in Cambodia to visit a casino. His whereabouts since then is unknown. His likely identity and other data also lead us to the conclusion that the listed company that suffered the HK$10.17bn loss is China Huarong Asset Management Co., Ltd (Huarong, 2799), as we show below.

Huarong is a massive state-controlled company established on 1-Nov-1999 as one of four "Asset Management Companies", each of which took over and managed the bad loans of a state-owned bank, in this case, ICBC, before the big 4 banks were listed. On 19-Apr-2018, Huarong announced that Mr Lai Xiaomin had resigned 2 days earlier as Chairman and director for unstated "personal reasons". The truth was that he is under investigation for "serious discipline violations" - the State's euphemism for corruption, as announced by the Central Commission for Discipline Inspection (CCDI) on 17-Apr-2018.

We don't know whether the SFC and CCDI are cooperating on their respective investigations.

The first transaction

The first transaction listed by the SFC is consistent with the sale on 29-Dec-2015 by Mr Yang's wholly-owned company of 145.7m shares (29.4%) of Telefield International (Holdings) Ltd (Telefield, now known as China Healthcare Enterprise Group Ltd, 1143). Telefield announced this on the day of the transaction. The buyers were subsidiaries of Huarong, which had its HK IPO just 2 months earlier.

The sale price was $9.9 per share ($0.99 adjusted for a subsequent 10:1 split), a total of HK$1442m excluding costs. We can see the settlement in the Webb-site CCASS Analysis System, with 145.7m shares moving from Kingston Securities Ltd (Kingston) to Partners Capital Securities Ltd (PCS) on 30-Dec-2015. In the two months before this, the market price of Telefield had surged 409% from $2.16 on 4-Nov-2015 to $11.00 on the transaction date, including a jump on the day of Huarong's purchase from $6.70 to $11.00 ($1.10 split-adjusted), providing a rather convenient reference price for the transaction. That remains its record daily closing high, valuing the company at HK$5451m.

By comparison, in the annual report at 31-Dec-2015, Telefield had net assets of HK$554m and made a net loss of HK$1.8m for the year. So it was trading at 9.84x NAV. Mr Yang's purchase price for the Telefield shares was $2.031 ($0.2031 split-adjusted) in a takeover announced on 22-May-2015 that closed on 4-Nov-2015. Kingston made the general offer on his behalf.

 It is also notable that 2 working days after the offer closed, on 9-Nov-2015, Kingston arranged a placing of 79.7m new Telefield shares at $2.44, which was completed on 27-Nov-2015. That diluted Mr Yang's stake from 71.50% to 60.00%, before his sale of 29.4% to Huarong at more than 4x the placing price. The stock closed on Friday (28-Sep-2018) at $0.063, down 94.3% from the record high.

The Telefield shares bought by Huarong were held and disposed of in two batches:

Overall then, based on the price of the asset swap with Hearts Capital, we estimate that Huarong lost 80% of its investment, or about HK$1154m.

The second transaction

By subtraction, the second transaction, involving the sale by Mr Yang of a "substantial interest" in a "non-listed company", is alleged to have caused Huarong a loss of about HK$9.02bn.

Huarong has such a huge, highly-geared balance sheet that under HK Listing Rules, it has never yet made an acquisition that rises to the threshold of a "notifiable transaction", so we can't point to any particular investment as the possible purchase from Mr Yang. In its interim report at 30-Jun-2018, it had total assets of CNY1845bn (then US$279bn) but it's shareholders equity was a more modest CNY119bn. The H-shares of Huarong account for 64.1% of Huarong's equity. Since Mr Lai's arrest, the shares have dropped 54.7% from HK$3.18 to $1.44, valuing the equity at HK$56.26bn (CNY63.9bn).

As Mr Yang's sale was of a "non-listed company", there aren't any clues there either. Suffice to say that if Huarong lost $9.02bn on an acquisition from Mr Yang, then the deal was at least that size. The SFC says that the sale was to "certain funds subscribed by" Huarong. In the half-year results for 30-Jun-2018, Huarong reported a plunge in profit attributable to equity holders to just CNY0.684bn from CNY13.360bn the previous year and stated:

"On 17 April, 2018, the relevant authorities in Mainland China instigated a disciplinary investigation into the former chairman of the Company. The Company has been closely co-operating with the relevant authorities... In this context, the Company has decided to initiate its own internal investigation, including into the structure of certain fund investments and loans, and their valuation and recoverability."

Mr Yang's brokers

The 3 brokers where Mr Yang's assets are frozen are Satinu Markets Ltd (Satinu), Kingston and HSBC Broking Securities (Asia) Ltd. We can see from the CCASS data that Satinu has custody of 1,481,567,297 shares (50.48%) of Landing, which exactly matches Mr Yang's declared stake. These are worth HK$3734m at Friday's closing price of $2.52. The stock is down 56.5% since he disappeared in August. The shares were moved to Satinu, then known as "Enerchina Securities Limited" on 19-Dec-2017, as Webb-site noted the next day, stating that "we could be in for a hard Landing". Split-adjusted, the stock was at $14.00 on the transfer day.

Satinu, once known as "Chung Nam Securities Ltd", is a broker in what we call the "Chung Nam Network", a cross-holding web of listed companies, BVI hubs, brokers and loss-making joint ventures between the listed companies that we have written about extensively over the years. Avoid them all.

We note that although the assets are frozen, the SFC's notice permits the brokers to "deal with or dispose of securities in the Accounts to cover the negative cash balance in the Accounts". This appears to imply that if the broker has provided margin loans (a negative cash balance) then it can still dump the stock to recover them.

Mr Yang still holds 1516.34m shares (25.5%) of Telefield (now known as China Healthcare Enterprise Group Ltd). These are probably held in his account at Kingston, which has custody of 32.93% as shown in CCASS.

One more thing

There's another big player in Landing which deserves some attention: China Goldjoy Group Ltd (CG, 1282), controlled by its Chairman Yao Jianhui (Mr Yao). Its interim report at 30-Jun-2018 shows a holding of 4.71% of Landing, just below the 5% shareholding disclosure threshold, then valued at HK$829.7m at $6.00 per share. The stock has dropped 58% to $2.52 since then, so that's a book loss of $481m for CG since 30-Jun.

Apart from CG's holding in Landing, based on Landing's interim report, Mr Yao has a private holding in Landing of about 2.85% which takes his total interest to 7.56%. Our analysis indicates that he subscribed HK$297m for 3,960,060,000 shares (then 2.69%) of Landing at $0.075 (79,201,200 at $3.75 split-adjusted) in a placing by Kingston launched on 31-Aug-2017. That completed on 14-Sep-2017, and we can see that he holds those shares via CCB International Securities Ltd. CG acquired shares at much higher prices than that - as it announced on 5-Jan-2018, 28-Feb-2018, 6-Mar-2018 and 8-Mar-2018. For the 4 transactions that it announced, the average price was $16.50 per Landing share after consolidation, so it has lost 84.7% on those purchases. We can safely predict that China Goldjoy offers neither gold nor joy, just misery.

© Webb-site.com, 2018

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