Webb-site Reports

We take a look at Midas Printing and its controlling shareholders China Cyberworld and Chuang's Consortium. Webb-site.com shows how another controlling shareholder is attempting to inject an over-valued investment to extract the cash raised during last year's dotmania surge. We urge minority shareholders to vote against this deal.

Midas the Soft Touch
19 January 2001

Sometimes we can't help but chuckle at the way money moves around this market. Take a look at Midas Printing Group Ltd (Midas) and you'll see what we mean. Their web site describes them as "the most diversified printing group in Hong Kong" which might explain why they are buying a stake in an online antique auction site.

Or perhaps it should be called an antique online auction site, because we have seen this one before, a year and a bubble ago...

The larges shareholder of Midas was formerly a private company called ERI Holdings Ltd (ERI), which in turn has been controlled by the managing director of Midas, Mr Lau Chuk Kin since the May-96 IPO. On 30-Jan-00 Midas announced that ERI had sold 80m shares (33.77% of Midas) at $0.88 each, of which 60m shares (then 25.33% of Midas) went to HK-listed China Cyberworld Ltd for $52.8m. That left ERI with a 9.6% stake in Midas.

Incidentally, the $0.88 per share on this deal compared with the market price of $0.31 on 21-Jan-00, the last day before news of the deal began to leak, prompting a denial on the next day followed by a suspension the day after at $0.65.

China Cyberworld is controlled by HK-listed Chuang's Consortium International Ltd which in turn is controlled by Alan Chuang Shaw-swee (Mr Chuang) and his sister Alice Siu Chuang Siu-suen (Ms Siu). Mr Chuang and Ms Siu (the Chuangs) own 66% and 34% of a company which bought the other 20m shares (then 8.44% of Midas) sold by ERI for $17.6m.

The deal was completed on 7-Mar-00, whereupon the non-executive Chairman, two executive directors and an independent director all resigned from Midas and four new executive directors were appointed. Yes, another takeunder transaction was complete! By then, Midas was swept up in dotmania and it shares had soared to $1.45.

Placings

Three days later, Midas placed 47m new shares at $0.88 each through Tai Fook Securities, raising $40.2m net of expenses for use as "additional working capital". The placing was due to complete by 15-Apr-00.

After renewing the general mandate to issue new shares on 23-May-00 at the AGM, another placing through Tai Fook took place on 12-Jul-00 of 60m new shares at $0.35 per share, raising $20.3m net of expenses for "additional working capital". The lower price was in the wake of the initial Nasdaq correction. The new shares were equivalent to 19.87% of the existing shares, almost exhausting the 20% allowed under the general mandate.

Combined, the two placings raised $60.5m net of expenses.

Treasure Auctioneer

At the same time as China Cyberworld was buying into Midas, it was also working on another deal. On 10-Feb-00 it announced the proposed purchase of 25% of Treasure Auctioneer International Ltd (Treasure Auctioneer) for HK$75m satisfied by the issue of 50m shares at $1.50 each. As well as the then-unlaunched website, the group "owned and operated an auction house located in Central, Hong Kong". In other words, a bricks-and-clicks model. China Cyberworld closed that day at $1.42 and yesterday at $0.23.

Of the 25% stake, 15% was from aptly-named Impressive Profit Investments Ltd (Impressive Profit), in turn owned 66% by Mr Chuang and 34% by Ms Siu. The other 10% came from a company owned equally by 3 independent individuals.

The price was based on a 14.3% discount to a valuation by American Appraisal Hongkong Ltd, at $87.5m as of 31-Jan-00, implying a valuation on the whole company of $350m. The valuation report was not published in the shareholders' circular, and the deal was approved by shareholders on 20-Mar-00.

The independent financial adviser was Asia Financial Capital Ltd, the same adviser that called Pacific Challenge's aborted acquisition of Cents.com fair and reasonable.

Treasure Auctioneer was incorporated in Nov-99 and up to 31-Dec-99, based on unaudited combined management accounts, had made profit after tax of $2.1m and had net assets of $12.1m. That implies the initial net assets of just $10m, or $2.5m for 25%. That sale was indeed an Impressive Profit.

Cashing out on Midas

Now skip forward almost a year, and we see that Midas announced on 15-Jan-01 a proposal to buy (you guessed it) 20% of Treasure Auctioneer from Impressive Profit (which is owned by the Chuangs), for a consideration of $68m, of which $52m is in cash and the rest in shares. That cash is equivalent to almost all the money raised by Midas in the two placings last year.

The other $16m will be satisfied by issuing 40m new Midas shares at $0.40 per share. The combined stake of the Chuangs and China Cyberworld was diluted to 21.81% by the placings, so this deal would raise their combined stake in Midas back up to 29.60%.

So you thought that valuations have gone down since the bubble burst? Not this one. Now the same valuer is valuing 20% of Treasure Auctioneer at $72.6m as at 15-Dec-00, implying that Treasure Auctioneer is worth $363m, up $13m on the figure of nearly a year ago

Now you might be wondering if there has been some improvement in the financial performance of Treasure Auction which justifies such a high valuation. On the contrary, the company is no longer profitable. The announcement states that since the company was incorporated "in Jul-99" (shouldn't that be Nov-99?) up to 30-Sep-00 it has made an unaudited consolidated net loss before tax of HK$3.7m and the net assets were down to $6.7m.

By subtracting the 1999 profits, we can see that in the first 3 quarters of 2000, Treasure Auctioneer made a net loss of $5.8m. The only mitigating factor is a growth in the claimed customer base from 1,500 to 2,700 although it is not known how many of those are actively transacting through the service. Total transaction volume (goods sold) in the 3 quarters was about $35m. Auction commission revenue was not disclosed but was presumably much less.

Option

Midas will also be granted a two-year option to buy another 15% of Treasure Auction from Impressive Profit for $51m, the same price per share as the main transaction. We can only hope that the future exercise or non-exercise of that option is treated as a connected transaction requiring shareholders' approval.

Conclusion

Because the investment in Treasure Auction is a "connected transaction" for Midas, it requires approval of minority shareholders. China Cyberworld and the Chuangs own 21.91% of Midas, but the rest is public, including the other directors.

Last year, ERI, controlled by the managing director of Midas, benefited from the sale to China Cyberworld and the Chuangs of 80m Midas shares at $0.88 at a large premium to market price. The dotcom transformation didn't happen, and now the price is only $0.27. We suggest that if ERI or Mr Lau has any Midas shares left, they should not be permitted to vote on this transaction.

We recommend that independent Midas shareholders vote against this transaction, which is vastly overvalued, results in $52m of cash extraction, consolidates the level of the Chuang's control and has no connection with its printing business.

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Midas the Soft Touch 19 January 2001