You are silly, Yuhua
17 September 2015
Time to make another example of the drivel that accompanies bonus issues and stock splits in this town. Yuhua Energy Holdings Ltd (Yuhua, 2728) has tonight announced a 2 for 1 bonus issue, which is equivalent to a 3 for 1 stock split. So the price will theoretically adjust from $1.49 to about $0.4967. However, they are increasing the board lot size from 4,000 shares to not 12,000, but 18,000 shares. Consequently, the market value of a board lot should increase by 50% from HK$5960 to $8940. A board lot is the minimum transaction quantity for the main trading system.
We would not disagree with the need for larger board lots to reduce transaction costs, given that minimum commission charges are usually a more prohibitive factor to transactions, and given that HKEx, via its settlement monopoly, still gouges investors for $1.5 per board lot of increase in their holdings between book closure dates as a "scrip fee" despite the fact that the scrip (share certificate) is immobilised in the depository. At tonight's close, Webb-site Who's Who shows that 589 stocks have a board lot value of HK$2,000 or less, out of 1808 listed shares. The smallest is at $76. 248 stocks are at $1000 or less per board lot, making the scrip fee at least 0.15%, which is more than many brokers charge in commission to buy a stock. Our data also show that the weighted average board lot value is currently HK$6270.
But Yuhua then says this, in "Reasons for the bonus issue":
"The Board proposes the Bonus Issue in recognition of the continual support of the Shareholders and the Bonus Issue will increase the total number of shares in issue and correspondingly result in downward adjustment to the trading price of the Shares so that the market value per board lot of Shares can be reduced to appeal to more investors. Accordingly, the trading liquidity of the Shares in the market may be enhanced. The Directors are of the view that the Bonus Issue is in the interests of the Company and the Shareholders as a whole." (our underline).
The market value per board lot is not being reduced, it is being increased, except for a brief period between 30-Oct-2015 and 13-Nov-2015, when the stock goes "ex-bonus" but before the bonus shares are issued and the board lot size changes. During that period, two-thirds of the market value of the company will be untradeable, because the bonus shares have not yet been issued, which of course means that investors are locked into two-thirds of their holdings over that period. That doesn't help liquidity either!
And we've said it before, a bonus issue or a stock split is not "recognition of the continual support of the Shareholders", who will be no better off because of it. That statement is deceptive. A bonus issue simply incurs transaction costs for the company they own. Trading liquidity is not generally improved by increasing the minimum transaction size. Furthermore, if the stock moves up just one current tick to $1.50, then the next move after the bonus issue would be in the wide part of the spread table from $0.50 to $0.51, a 2% minimum spread size, further damaging liquidity, whereas it is currently at a tick size of $0.01 or 0.67%.
If they were honest about it, they would admit that after a (probably undeserved) run up in the share price, they simply want the optical effect of a share price below $1, to "appeal to more stupid investors" who might think that low nominal share prices make a stock fundamentally cheaper. At 30-Jun-2015, Yuhua had net tangible assets of HK$339.9m, or $0.44 per share after the 2:1 stock split on 8-Jul-2015. So at $1.49 it is trading at 3.39x book value.
By the way, the auditors of this firm are Cheng & Cheng Ltd, of EPS snafu fame.
Yuhua has tonight published a "clarification announcement" responding to our article. It dissects the previous announcement, saying that the statement quoted above was not false or misleading, because they were looking at the bonus issue in isolation and not commenting on the effect of the subsequent board lot change. But of course, the two were proposed together, and the second is conditional only on the first, so you can't have one without the other.
They also say that even though the value per board lot will increase:
"the number of Shares to be held by the public Shareholders will increase...the Board is of the view that an increase in the trading volume of the Shares could be seen following the Bonus Issue and therefore the Shares are likely to experience increased liquidity as a result."
That's a fundamental error and another false and misleading statement - liquidity is a measure of turnover - either the dollar amount or the proportion of publicly held shares traded, depending on context, but not the absolute numbers of shares. Volume is not turnover. Tripling the number of shares of course means that more shares will be traded, but not more liquidity. The stock price closed today at $1.44, implying a $0.48 post-bonus price and a tick size of $0.005, or 1.04%, compared with the current $0.01, or 0.69%. Having a bid-offer spread which is 50% larger is not likely to help liquidity, and they fail to address this point.
Yuhua has today announced that the proposed bonus issue and change of board lot size will be "postponed to such time as and when the Board determines appropriate".
© Webb-site.com, 2015
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