The Ghost of CT3
9 September 1999

This is the story of how the undisclosed owner of two BVI companies made a profit of US$84.8m, or 70%, by buying an interest in Container Terminal 3 at a 45% discount to a contemporary valuation and selling it a year later to New World Infrastructure Ltd (0301, NWI). The bulk of this stake was sold by Yu Ming Investments Ltd (0666), then known as SHK Hong Kong Industries Ltd.

As always, we start with the background....

Container Terminal 3

The development of CT3 at Kwai Chung was awarded by the Hong Kong Government to Sea-Land Orient Ltd (SLO) in 1970. SLO is a subsidiary of CSX Corporation, a US-listed transportation giant. At the time, the only other port operators were Hutchison and Modern Terminals Ltd.

Asia Terminals Ltd

Asia Terminals Limited (ATL) was established in 1981 as a joint venture between SLO (51%) and Far East Consortium Limited (0035, 49%). It built and operates the enormous container freight station and cargo distribution centre known as Asia Terminals Centre over one end of the land at CT3.

In 1985, New World Development Co Ltd (0017) acquired Far East's 49% interest in ATL and subsequently sold a 10% stake to Central Development Ltd, the private property firm which owns (amongst other things) the quaintly-named Central Tower and Central Building in Central. RJ Reynolds Tobacco Inc, the US tobacco giant, acquired a 1% interest in ATL from SLO, reducing its stake to 50%. 

Ready City

In 1991, SLO transferred both CT3 and its 50% interest in ATL to Sea-Land Orient Terminals Limited (SLOT), a newly incorporated company, in which Ready City Ltd (RCL) then bought a 33.34% stake, leaving SLO with 66.66%. 

The NWI prospectus dated 17-Oct-95 states:

"the shareholders in RCL were initially introduced and brought together by New World for the purpose of forming a consortium to acquire this interest in SLOT"

According to the prospectus, RCL was then owned as follows:

JF Asia Select was an investment company managed by Jardine Fleming, and likewise Standard Chartered Asia Development Capital was managed by the bank of similar name. Kopola Investment Company was owned 50:50 by two brothers, Hamilton Ho Hau Hay and Norman Ho Hau Chong. Norman Ho was a director of Yu Ming until 21-Jun-96.

Hong Leong International (Hong Kong) was a subsidiary of Hong Leong Investment Holdings Pte Ltd, which in turn was (and is) held by Kwek Holdings Pte Ltd and various members of the Kwek family of Singapore which controls Singapore-listed City Developments Ltd. 

Sunnet Investment

The NWI prospectus does not mention that Sunnet Investment, which owned 9% of RCL, was itself related to New World. An annual return of Sunnet filed in Singapore in 1995 reveals that Chow Tai Fook Enterprises Ltd, of the Cook Islands, held 47.69% of Sunnet. Chow Tai Fook is the controlling shareholder of New World Development. A number of BVI companies were also on the register.

Directors of Sunnet included Cheng Yu Tung, Chairman of NWD, his sons Henry Cheng Kar Shun and Cheng Kar Shing, and his brother Cheng Yue Pui, as well as Chan Kam Ling, who is a director of NWI and NWD.

If we take Sunnet and NWI together then their combined interest in RCL was 50.5%, normally enough to control the company.

The Valuation of RCL

The NWI prospectus on 17-Oct-95 contained an independent valuation of its interests in ATL and SLOT by Colliers Jardine. The reference date for the valuations was 31-Aug-95 but there would not have been any material change between that date and the prospectus date (since otherwise the prospectus should have said so).

Since SLOT was the only material asset of RCL, we can use these valuations to infer a valuation on RCL. The valuation of NWI's 13.84% interest in SLOT was given as HK$1,203m, while NWI's 45.92% effective interest in ATL was valued at HK$1,530m. Now remember that NWI had a 39% direct interest in ATL, which we must remove for the purpose of our calculation. The other 6.92% interest in ATL arose from holding 41.5% of RCL which owned 33.34% of SLOT, which owned 50% of ATL. Multiply those 3 figures together and you get 6.92%.

So we can split NWI's interest in ATL as follows:

 This means we can now infer a valuation of NWI's 41.5% stake (83 shares) in RCL:

The Yu Ming Sale

On 9th November 1995, just 23 days after the valuations were published, Yu Ming and others entered into agreements with two anonymous BVI companies called Peak Success Ltd and Enrich Ltd in respect of the sale of a 49.5% interest in RCL. The bulk of this stake, 35.5% of RCL, was sold by Yu Ming. As practitioners will know, one of the great things about BVI companies is that it is impossible to access their share registers without their consent, so they are a dead-end in investigation terms. They can also have bearer shares, with no registered owner.

RCL had 200 shares in issue and Yu Ming sold 71 shares (35.5%) to Peak Success. For each share there was also a shareholder's loan to RCL, but as this is the same for each share, we can simplify the process by treating the entire consideration as being paid "per share" (probably to reduce stamp duty, Peak Success bought the shares while Enrich bought the shareholder loans). Yu Ming also was a sub-participant in a loan to RCL through a financial institution which amounted to about US$271k at 7-Nov-95.

The price which Peak Success and Enrich paid Yu Ming was about US$86.87m. Deducting the small loan sub-participation amount, this reduces to US$86.60m (then HK$669.8m) or US$1.220m per share.

But wait a minute - three weeks earlier, the same interests had been professionally valued at the equivalent of US$2.233m per share. So Yu Ming sold its stake for at a 45% discount to the valuation. Yu Ming was the largest but not the only shareholder of RCL to sell its stake in RCL; other shareholders holding 28 shares, or 14%, also sold on the same terms, giving the buyer a total of 99 shares, or 49.5%. The only shareholder who didn't sell was Sunnet Investment, which as we have noted, was related to New World. Perhaps they didn't like the terms.

That of course made us wonder why New World didn't buy the 49.5% stake instead. As the owner of 41.5%, it would be the natural buyer to increase its stake to 91%. The price paid by Peak Success and Enrich was a total of US$120.8m (HK$933.9m) and the discount to valuation amounted to US$100.3m (HK$775.9m).

Interests in Yu Ming

The sale of RCL was a "Major Transaction" for Yu Ming, (the proceeds represented 65% of its net assets at 30-Sep-95) but because it was not a connected transaction, Yu Ming was able to obtain written approval from more than 50% (in fact, 58.03%) of its shareholders and thereby avoid a general meeting. The shareholders at the time included Sun Hung Kai & Co. (through various subsidiaries, holding 22.95%), China Poly Group (the People's Liberation Army arm, holding 11.39%) and Tony Fung Wing Cheung (11.39%), who was then, and is now, the Chairman of Yu Ming. Together with Norman Ho (0.96%) these added up to 50.31%, so assuming they consented, another 7.72% of shareholders gave their consent.

At 30-Jun-95, about 4 months before the transaction, the substantial shareholder list had also included Gold Triple Ltd (10.33%) in which both Sun Hung Kai & Co. and New World Development were interested (meaning they owned at least one third of it each- the name suggests a third owner). NWD also had an 8.64% interest in Yu Ming via a company called Concord Associates Ltd, while Tony Fung held no shares at all. Henry Cheng, Peter Cheng and Alexander Chow Yu Chun (all from NWD) were directors of Yu Ming until 18-Sep-95, less than two months before the transaction. Mr. Chow has recently (16-Jun-99) been reappointed to Yu Ming, this time as an "Independent Non-Executive Director".

In the intervening period prior to the RCL sale, Gold Triple and NWD had disappeared from the substantial shareholder list (meaning they were interested in less than 10%) and Tony Fung had increased his holding from zero to 11.39%. Bringing you up to more recent times, as of 31-Dec-98, Mr. Fung had increased his interest to 34.58% of Yu Ming, just below the 35% takeover threshold.

Since the agreement for the sale by Yu Ming of its RCL shares was "in the ordinary course of business", the circular to shareholders describing the transaction did not list the agreement under "material contracts" and therefore it was not included in the documents which were put on display. That's a loophole the Stock Exchange should close.

Now we come to the meat in the sandwich......

One year later

Roll the clock forward a year, and on 25-Nov-96 we find an announcement by NWI that it has... guess what...agreed to buy Peak Success and Enrich (which own the 99 shares in RCL and the shareholder loans to RCL) for HK$1,590m (US$205.6m) from another BVI company called Tiffiny Overseas Ltd, whose owner(s) were not disclosed. This agreement followed a non-binding memorandum of agreement dated 6-Nov-96, when it was agreed that the consideration would be split 50% shares and 50% cash. The purchase increased NWI's interest in RCL from 41.5% to 91%.

The price per share agreed by NWI works out at US$2.077m per share, or a reasonable discount of 7.0% to the valuation published a year earlier. NWI was advised by Goldman Sachs on the transaction and on this occasion we have no reason to doubt their judgment, nor do we query the earlier professional valuation by Colliers Jardine.

Regardless of whether you agree with the valuations, the anonymous ultimate owner(s) of Peak Success and Enrich made a profit of US$84.8m (HK$656m) in just 1 year, or a return of 70%. In our calculation we have ignored the fact that by the time the deal with NWI was signed on 25-Nov-96, the value of the NWI shares forming half of the agreed consideration had increased by 13.6% since the non-binding memorandum of agreement on 6-Nov-96, adding a further HK$108m to the deal.

What do we know?

This whole affair raises some interesting questions, to which we will probably never get answers, but if you wish to tell us, anonymously, e-mail us, and with your help we may progress. Perhaps you were working for one of RCL's shareholders at the time and may recall the sale.

We wonder why the other shareholders of RCL (excluding the NWI-related Sunnet) chose to go with Yu Ming into the deal. They were making a decent profit over their 1991 book cost, but that's not the point - if they had done their sums (as we have done) then they would know that the offer was a 45% discount to a contemporary valuation.

Who were the beneficial owner(s) of Tiffiny Overseas, Peak Success and Enrich? Did the boards of Yu Ming and NWI (including the independent directors) know who they were dealing with? The respective announcements only describe Peak Success, Enrich and Tiffiny Overseas as being (in standard terms) "independent third parties". 

Why didn't NWI step in and make a better offer to Yu Ming for its shares in RCL? After all, they were the obvious potential buyer. It is not unusual to have pre-emption arrangements in a joint venture such as RCL, so that any shares must be offered to other shareholders before being sold to third parties. Was this the case in RCL, and if so, did NWI, freshly funded by its flotation, reject this attractive offer? Indeed, the NWI prospectus stated that of the flotation proceeds:

"approximately [HK]$901m will be used for potential investments in possible future projects and to fund negative operating cashflows and other general corporate purposes".

That left it wide open for the proceeds to be used on acquisitions such as RCL.

Independent shareholders of NWI must wonder why the company didn't act on the apparent opportunity in 1995, and get the stake at a 45% discount to valuation. Equally, independent shareholders of Yu Ming must wonder why they didn't get the benefit of the 70% premium paid a year later. Meanwhile, the ghost(s) of CT3 are happily counting their US$85m profits.

A footnote

At the time of the purchase by NWI of Peak Success and Enrich, taking its interest in RCL up to 91%, the remaining shareholder of RCL was no longer Sunnet Investment (a Singaporean company related to New World) but had become Favour Investments Ltd (described as an independent third party). According to the 1998 annual report of NWI, in May-98, NWI acquired this stake, increasing its interest to 100% of RCL.

© Webb-site.com, 1999

Organisations in this story

• ATL LOGISTICS CENTRE HONG KONG LIMITED
• CSX WORLD TERMINALS HONG KONG LIMITED
• NEW WORLD TMT LIMITED
• READY CITY LIMITED
• SHK Hong Kong Industries Limited

People in this story

• Fung, Tony Wing Cheung

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