Porky Yorkey, Round 2
1 June 2015
Two years ago, Webb-site called on minority shareholders of Yorkey Optical International (Cayman) Ltd (Yorkey, 2788.HK, 9188.TT) to veto connected transactions with its largest shareholder unless the board took steps to return the massive amounts of surplus cash to shareholders. We were unsuccessful in that campaign, but we are back to fight again, this time with a larger holding and, we hope, more support.
Yorkey has proposed renewing connected transactions with its largest shareholder, Asia Optical Co., Inc. (Asia Optical, 3019.TT). The proposal covers the next 3 years, so this is the last chance we have for any activism at Yorkey until 2018. There is a EGM circular dated 5-May-2015, for a meeting on 18-Jun-2015. We urge independent shareholders to VOTE AGAINST the only resolution at the EGM, as shown on the proxy form.
Also, the Annual General Meeting occurs 2 hours before the EGM. The AGM circular is here. Referring to the resolutions on the proxy form, we urge shareholders to VOTE AGAINST items 4(i) to 4(vii) (re-election of all directors) and as usual VOTE AGAINST items 6 and 8 (general mandate to issue new shares). We are unlikely to win at the AGM because Asia Optical can vote, but it will send a clear vote of no confidence in the way the board has been behaving.
If you are a registered shareholder (with a share certificate) then you can send a proxy form yourself, but otherwise you should instruct your bank, broker or custodian (your intermediary) who holds your shares (or in Taiwan, TDRs) to vote on your behalf. You can indicate your instructions by sending the following templates to your intermediary: template for EGM and template for AGM.
The pork
Not much has changed since 2013, except that Yorkey has become even fatter. Back on 31-Dec-2012, it had cash of US$113.1m and no debt. Two years later, cash has increased to US$122.6m with no debt. Turnover declined from US$92.8m in 2012 to US$84.5m in 2014, but profitability has improved. There are 827.778m shares in issue, unchanged. There are no substantial capital expenditure plans.
At the exchange rate of US$1=HK$7.75, there is HK$949.9m of cash, or about HK$1.148 per share. The share price closed on Friday 29-May-2015 at $1.11, a discount to the cash. Net tangible assets are US$145.4m (HK$1126.9m) or HK$1.361 per share. So the cash is equal to 84% of the net assets.
We consider that a reasonable working capital provision, without incurring any debt during the year, should not exceed 3 months' turnover or US$21.1m (HK$163.6m), or about HK$0.198 per share. That leaves room for a distribution of HK$0.95 per share. The result would be a slimmer, fitter Yorkey, with the potential for it to become a shell for a better business in a back-door listing.
For 2014, Yorkey has proposed only a final dividend of $0.035 payable on 21-Jul-2015 and a later special dividend, not payable until 3-Sep-2015, of $0.035, by which time it will probably have earned that much in net operating cash flow and interest.
As investors, we are not concerned that blocking the connected transactions will damage Yorkey's business, because this amounts to less than 20% of Yorkey's turnover (17% in 2014), it has other arm's length customers and because shareholders would be better off if it shut down its business and became a listing shell. Besides, if we are successful in blocking the connected transactions, then after the EGM there is nothing to stop the board declaring a special dividend of the surplus cash, in which case we would be willing to move forward and renew the connected transactions at a second EGM.
The ownership structure
Taiwan-listed Asia Optical Co., Inc. (Asia Optical, 3019.TT) owns 27.40% and is the counterparty to the connected transactions, so it cannot vote.
Another Taiwan-listed shareholder, Ability Enterprise Co., Ltd. (Ability Enterprise, 2374.TT), with 17.37% can vote, and this time, we believe that it will see the value potential in this transaction, as they voice opposition to the hoarding of cash at the last AGM and voted against management.
Since the previous battle, Webb-site Editor David Webb has increased his holding through the 5% disclosure threshold and now holds over 6% of Yorkey. So together with Ability Enterprise, that is likely over 23.4% against the connected transactions.
However, the so-called "Employees' Trust" represented by its trustee Fortune Lands International Ltd (Fortune Lands) still holds 13.65% (yes, not a single employee has ever withdrawn his or her share entitlement) and can vote. It is a near-certainty that it will vote in favour. The board of directors of Fortune Lands comprises Yorkey's co-founder and former chairman Mr Cheng Wen Tao, the CEO, a senior manager Mr Chen Yao Tang (who holds 100% of Fortune Lands) , and two of its so-called independent directors.
Another threat exists from the Taiwan Depository Receipt (TDR) program. As we reported on 18-Jun-2014 (Citibank vote-stuffing in HK AGMs), Yorkey has been using a provision in the TDR agreements to appoint a discretionary proxy to vote any shares for which the TDR-holders have not given voting instructions. As TDR-holders are mostly retail investors who either can't or don't give instructions via their brokers or banks, this resulted in all of the underlying TDR shares being voted by a discretionary proxy appointed by Citibank, the custodian in the TDR program, and he voted in favour of all the board's proposals at the AGM.
It is unclear whether management's instructions to appoint a proxy were given directly to Citibank or via the Taiwan depository, CTBC Bank, but either way, we call on Citibank in Hong Kong not to repeat the mistake by accepting similar instructions again. Citibank should not facilitate vote-stuffing in Hong Kong with shares for which the beneficial owners (the TDR holders) have not given instructions. It should require confirmation from CTBC that any instructions it provides have been given by TDR holders. And of course, we call upon TDR holders to vote against the connected transactions and prevent anyone from abusing their voting rights. For more on the TDR problem, see your editor's CNBC appearance on 18-Jun-2014.
Currently there are 72.986m TDRs, or about 8.82% of Yorkey. In the worst case, if Citibank repeats its atrocious behaviour and issues a discretionary proxy at management request, then along with Fortune Lands there will be 22.47% in favour of the connected transactions.
Act now!
So it could be 23.4% against the connected transactions and 22.5% in favour, with the unknown factor being the 26.76% held by other independent shareholders, including institutional and retail investors. So if you hold Yorkey shares, don't sit back and let bad things happen. Contact your bank, broker or custodian, and vote against the connected transactions at the EGM. Not sure how? See our voting guide.
© Webb-site.com, 2015
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