We take a look at the sordid past of LCD maker Yeebo International Holdings Ltd, now under new management. The past presents a case study in criminal fraud and bad internal corporate governance. We also look to the future of the group, which was rescued by a textiles tycoon who last year saw shareholders reject his proposed systems integration investment priced at 59.1x earnings. Now, the company is cashed up with a new industry-related 34.7% shareholder.

Criminal Record
27 August 2001

We roll back the clock with a corporate horror story from the electronics sector, Yeebo International Holdings Ltd (Yeebo), a maker of LCD displays and printed circuit boards. The company was floated on the SEHK on 1-Sep-93. Its Chairman and Managing Director was Makie Hui Po Yuen (Mr Hui).

On 19-Mar-96, the shares of Yeebo were suspended and the company announced it had commenced legal proceedings in HK claiming substantial damages against "one of the Company's directors" who later turned out to be Mr Hui.

The board meeting that day, absent Mr Hui, set up an independent investigative committee comprising independent non-executive director (INED) Kenneth Fang Hung (Mr Fang), Finance Director Frankie Li Kwok Wai (Mr Li), and Financial Controller and Company Secretary, Kelvin Lam Kam Cheung (Mr Lam). The other INED, Wong Sun (Mr Wong) was not present at the meeting. More about him later!

Mr Fang joined as an INED on 22-Aug-95. He is also Chairman of the Hong Kong Productivity Council and of his private family company, Fang Brothers Knitting Ltd, which recently bought the UK knitwear business Pringle. His private interests include Zeppelin group, where he is Chairman and Mr Li is Managing Director. Mr Li joined as a director of Yeebo on 8-Nov-95.

What later transpired showed how little the Finance Director and Financial Controller knew about the true finances of the company.

On 22-Mar-96, referring to the writ, Mr Hui announced that:

"any allegation of fraud and/or deceit and/or breach of fiduciary duty against me is categorically denied and any allegation that I have misappropriated... any money belonging to the Company is totally true and unfounded."

Mr Hui resigned on 27-Mar-96 along with 3 other executive directors, Rue Steel Marshall Jr (Mr Marshall), Harry Shizuo Suzuki (Mr Suzuki) and Hui Wing Ching.

Yeebo also informed the Commercial Crime Bureau and this eventually led to criminal fraud charges being laid against Mr Hui on 20-Apr-98. In Aug-00 he was convicted of embezzling HK$80m (out of charges totalling $100m) involving 23 charges of theft, four charges of false accounting and two of publishing a false statement (namely, the Mar-94 and Mar-95 accounts of Yeebo, the first two years it was listed). He was acquitted of 3 other theft charges, and was sentenced to 7 years in jail.

The writ filed by Yeebo on 19-Mar-96 claimed damages of $86.4m in respect of alleged breaches of fiduciary duties during 1993-1996. On 10-May-96, Yeebo added, amongst others, Mr Marshall and Mr Suzuki as defendants to the proceedings. The total amount of the claim by then amounted to HK$217m. 

The accounts for the year to 31-Mar-97 stated:

"On 10th May 1996, certain of the Group's other former directors and officers were added as defendants to these proceedings together with certain suppliers of plant and machinery... for alleged frauds perpetrated against the Group."

For each of the 3 years to 31-Mar-00, a similar statement appeared in the notes to the accounts, concluding in 2000 that:

"no significant progress has been made during the year and up to the date of the report with respect to this action."

Proceedings discontinued?

In the latest accounts for the year ended 31-Mar-01, no statement about the litigation was made, so we wonder whether the company has given up actively pursuing it. Mr Suzuki died on 6-Sep-97 and received a glowing tribute in the annual report for that year. In the Mar-01 accounts, another defendant, Mr Marshall, was still listed as a senior manager of Yeebo responsible for LCD manufacturing operations.

The Mar-96 accounts restated the 1995 financial position in the following respects:

In addition in the year to Mar-96, a further $10m of purported plant and machinery deposits in the Mar-96 year were written off. All told, the hole in Yeebo's accounts now totalled $234.7m, leaving it with net liabilities at 31-Mar-96 of $9.7m.

Kin Son's failure

Another $15.3m was written off in 1996 due to the liquidation of Kin Son Electronic (Holdings) Ltd (Kin Son), another HK-listed electronics company.

Mr Hui had obviously been a good friend of Kin Son's Chairman, So Kin Keung (Mr So), who was also at one time a Yeebo director. Yeebo purchased fixed assets from Kin Son and leased them back to Kin Son, accounting for $11.2m of the write-off since the assets were in Kin Son's custody and not recovered. Yeebo also lent $8.2m to Kin Son and another $3.6m was due as accounts receivable. That adds up to a loss of $23.0m

In Aug-95, Mr Hui, Mr Suzuki and Mr Marshall had provided a joint and several indemnity to Yeebo "in respect of all losses that the Group may incur in connection with certain amounts due from Kin Son". A separate indemnity was give by W C Hui. In fact, only $7.7m was recovered from the indemnity by offsetting amounts due to the former Yeebo directors. In the Mar-96 accounts, the new board of Yeebo took the view that:

"it is uncertain at this time as to any further amount that will be recovered... under the deeds of indemnity."

Mr Hui had also been personally lending money to Mr So. Mr Hui pledged 50m of his Yeebo shares to three individuals to secure loans to Mr So, and at least 27.33m were sold between Apr-95 and Jul-95 because Mr So had defaulted on the loans, reducing Mr Hui's stake from 45.6% to 39.5%. Mr So vanished in Mainland China in Jul-95 and has not been heard of since. Kin Son filed for liquidation in Aug-95.

In Oct-95, National Bank of Canada sued Yeebo for US$3m pursuant to a purported undated guarantee executed by or on behalf of Yeebo for monies advanced by the bank to Kin Son. On 7-May-96 the claim was amended to add the alternative of US$3.9m with respect to alleged misrepresentation from a former director of Yeebo. The claim was eventually settled without admission of liability during a restructuring of Yeebo.

Warning sign from Chengdu

We had Mr Hui's measure some time before Yeebo hit trouble. In one of our earlier pieces of shareholder activism, long before Webb-site.com existed, we noticed that the Mar-95 results of Yeebo announced on 23-Aug-95 included a new disclosure that the electronics maker had

"diversified into the hotel business in Chengdu, Sichuan Province of the PRC...The Group has signed a joint venture agreement in August 1994 with Sichuan [Province] Textile Industrial Supplies Corporation [SPTIS] for the construction of a 263-room three star hotel in Chengdu. The Group owns a 55% interest..."

That kind of "diversion" is usually a clear sell signal, so we sold, and wrote to Mr Hui and the Stock Exchange, pointing out that the hotel investment, at 22% of Yeebo's net assets, even under Hong Kong's lax standards, should have been disclosed when it happened a year earlier and a circular should have been sent to shareholders. The trigger point for such disclosure was (and remains) 15% of net assets. Our complaint resulted in a flimsy circular being sent to shareholders on 6-Nov-95. The circular did not even give the address of the nearly-completed hotel, just that it was in the Jin Nui District. To this day, we cannot figure out which one it is, although this one fits the description.

We also objected to shareholders' funds being used in this obviously non-core activity. The circular said:

"The reason for the diversification... is that the Board, including the independent non-executive directors, believe the expected returns from the above investment will be lucrative"

The independent directors at that time were Mr Fang, who joined on 22-Aug-95, and Mr Wong, who joined in 1993. How lucrative was the project? It emerged in the accounts for the year to 31-Mar-96 that:

"During the year, the Group had a dispute with the joint venture partner... who failed to contribute to the joint venture the land use rights on a piece of land on which the hotel... has been built"

On 17-Jun-96 SPTIS made a claim against Yeebo for RMB10.6m (HK$9.9m) in respect of an alleged breach of the JV agreement by Yeebo and demanded termination of the JV.  In the two years to Mar-97 Yeebo wrote off the entire HK$57m invested in the project. Eventually the Chinese courts ordered the JV to be liquidated, and Yeebo recovered just HK$6.9m of the investment after expenses. That's how "lucrative" the project was.

The New Team

The exposure of Mr Hui's fraud was followed by the resignation on 27-Mar-96 of 4 out of the 5 executive directors, including Mr Hui. The next day, finance director Mr Li became CEO and financial controller Mr Lam became an executive director. They remain in these positions at the time of writing.

The new management brought with them basic controls which had previously been lacking, such as requiring two signatures on outgoing cheques.

Prior to joining Yeebo, Mr Lam was an auditor with Deloitte Touche Tohmatsu and had been a member of the audit team for Yeebo in 1993-1995, which included the years in which Mr Hui was busy embezzling the group and making false financial statements. We make no suggestion that Deloittes should have detected the fraud in their audit work.

Restructuring

Mr Fang became non-executive Chairman of Yeebo in Sep-96. In 1997, after several restructuring proposals from various parties, a deal was reached with the banks in which Mr Fang and Mr Li, through Antrix Investment Ltd (Antrix of which they owned 51% and 49% respectively) underwrote an open offer of new shares. Prior to that, Mr Fang and Mr Li owned only 0.63% and 0.16% of Yeebo.

Existing shares were consolidated 10 for 1, and the open offer was for 158m new shares at $1 each, on the basis of 7 new shares for every 2 shares held. Yeebo's bankers, who were owed $257.2m, agreed to sell up to $118.5m of the debt to Antrix (financed by an equal loan from the banks to Antrix) to enable it to take up its underwriting position up to 75% of the new issue. The effect of this was that, as long as the subscription by other shareholders was at least 39.5m shares (25% of the issue) then Antrix would be able to borrow the entire cost of its stake. The banks would get $36.5m of the issue proceeds. In addition, the banks agreed in effect to bear up to $30m of future litigation costs.

In the end result, by 30-Sep-97 Antrix held 83.1m shares (41%) of Yeebo and bank debt was reduced to a term loan of $106m.

Fellow textiles tycoon and legislator James Tien  Pei-chun, Chairman of Manhattan Holdings Ltd, became an independent director of Yeebo on 16-Jun-97.

On 5-Aug-98, Mr Wong resigned as an INED and Allan Chu Chi Wai (Mr Chu) was appointed in his place. Our database reveals that Mr Chu is co-founder and former Chairman of Team Concepts Holdings Ltd, a HK-listed maker of fixed-line phones which ran into financial stress in the late 1990s and after three name changes is now known as South Sea Holding Co Ltd. The old name is gone, but the outdated web site survives. Mr Chu knew Mr Fang, as Mr Fang was an INED of Team Concepts until 5-Jun-97. Now the positions are reversed!

Mr Wong was an "Insider Dealer"

Mr Wong's resignation from Yeebo was followed in Dec-98 by Insider Dealing Tribunal proceedings against him and others, in relation to the shares of Hanny Holdings Ltd (Hanny). Mr Wong was the former chairman of Hanny. Mr Wong and two other former directors of Hanny were found to be insider dealers and ordered to pay to the Government a total of HK$35m in restitution, plus $45m in penalties and $9.6m in costs. Mr Wong's fine set a new record for the Insider Dealing Tribunal, being liable for $47.4m, including the $17m profit he had made.

Second Open Offer

On 14-Dec-98, with repayments looming under the term loan, Yeebo made another open offer, this time of 3 new shares for every share held at $0.20 per share. The offer at par value was above market price and was not underwritten. The offer was 70% subscribed, raising $85.5m gross. Mr Li, Mr Fang and Antrix took up their full entitlements, raising their combined stake to 53.75%.

Connected transaction Vetoed!

On 28-Mar-00 (in the heat of dotmania) Yeebo announced a proposed investment of the US dollar equivalent of RMB100m (HK$94m) in a joint venture, in which Mr Fang would also invest RMB100m and two PRC companies would be injected. Yeebo and Mr Fang would each get 14% of the joint venture, with the owners of the PRC companies holding the rest. The PRC companies were systems integrators for telecoms companies in the PRC. The deal was priced at 59.1x combined earnings.

Originally Yeebo hoped that its investment would go around in a circle, with the JV investing RMB100m in 190m new Yeebo shares. It turned out that this would require various government approvals in the PRC which would not be easy to get. So on 17-May-00 Yeebo announced a modification to the deal in which Yeebo's investment, for a 13.5% stake, was to be funded by an open offer of 3 new shares at $0.25 for every 2 old shares held, and underwritten by Mr Fang.

At the SGM on 30-Jun-00, in a very rare event in HK, independent shareholders voted against the deal and it was aborted.

Have money, Can do

A Memorandum of Understanding was announced on 31-Oct-00 and an agreement was announced on 22-Nov-00 in which Cando Corporation (Cando), a private Taiwanese company agreed to subscribe 350m shares at $0.40 each, giving it 34.7% of the enlarged issued share capital. That diluted Antrix, Mr Fang and Mr Li from 54.2% to 35.4%. No takeover offer was needed since Antrix and its concert parties maintained a "controlling" stake of more than 35% (with or without Cando) while Cando remains just under the 35% takeover threshold.

Founded in 1994, Cando makes indium-tin-oxide (ITO) coated glass, which is used in STN/TN LCD displays (the sort you find in watches, phones and palm devices). Cando also makes colour filters which are used in TFT LCD displays (the sort you find in lap-tops and flat-panel monitors). Cando supplies ITO glass to Yeebo accounting for less than 5% of the purchases of Yeebo.

Cando is owned by a consortium of Taiwanese companies. It is 16.6% owned by Teco Electric & Machinery Co Ltd, which makes electric motors and air conditioners, 16.29% by San Yo Pharmaceutical Co Ltd, and 6.06% owned by Fortune Venture Investment Group. The "Management Team" of Cando own 14.96%.

The gross proceeds of $140m were intended by Yeebo to "upgrade the existing production facilities of, and to provide general working capital to, the group".

The subscription was approved by shareholders on 5-Jan-01 and completed on 12-Feb-01. Dr Harry Ling, Chairman and CEO of Cando, became an executive director of Yeebo on 26-Apr-01. Cando's CFO, Daniel Chen Chin Tung, became a non-executive director on the same day.

As a result of the subscription, Yeebo is now cash-rich and ready for expansion. At 31-Mar-01 it had net cash of about $164m, or about $0.161 per share, and trades at $0.34, close to the net asset value of $0.345 per share.

Let's just hope that this time, the new management stays clear of hotels in Chengdu. One thing they might consider is expansion in their own industry. A local listed company in the same sector is Kessel International Holdings Ltd (Kessel), which recently ran into working capital problems from over-expansion. It makes LCD panels and modules, PDAs (including its own Linux palm-top through wholly-owned Agenda Computing) and digital cordless phones, both of which consume LCD panels. Kessel's shares has been suspended for several months awaiting a rescue plan. Another possibility is an injection of Cando into Yeebo, if it is seeking a listing.

Note: for the purposes of disclosure, Webb-site.com editor David Webb has a shareholding in Kessel.

© Webb-site.com, 2001

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