Posted by: donmihaihai | September 19, 2007

China Powerplus acquisition, what the heck?

China Powerplus a.k.a Zhongguo Powerplus announced that they are buying 30% of China Steel Pte Ltd and it is a major transaction. Beside that it is an interested person transaction as Mr Lim Hung, son of Mr Lim Seck Yeow own 50% of China Steel. It is clearly written on the beginning of the announcement, so classify it as good disclosure? Maybe yes but with the recent happening on Lim SY related companies, it must be prudent or best interests of China Powerplus to show hand 1st. What more there must be certain guideline to be followed for this kind of proposal and interested person transaction is certainly one of them.

After some sweetening, here comes the sour part.

1) On 31/03/07, China Powerplus announced that they are appointing Lehman Brother for advisory on business and other investment opportunities to enhance shareholders value. So is this acquisition considered as one of their babies? How strange, paying big bucks to financial institution to buy company that they themselves owned(Lim family). Who is having a better picture here? Lim family or Lehman Brother? If it is Lim family, why goes thru one big round and pay big bucks for this kind of transaction….???

2) In Zhongguo Powerplus prospectus, yes someone still bother to read its prospectus dated Aug 2004, it mentioned that Yongjia is a subsidiary of Yilida and thru restructuring exercise prior Zhongguo Powerplus IPO, Yongjia was acquired and become wholly subsidiary of ZGPP. Mr Xue YongWen and his wife own 99% of Yilida group which engage in the activities of “manufacture of cement and steel, property, construction and operation of petrol station and health spas.” The name of the game is “Yilida“. ZGPP is related to Yilida prior to IPO and the wholly owned subsidiary of China Steel is call Linyi Yilida Steel Mill Co. Ltd. Lim Hung owned 50% of China Steel, so who is the other 50% owner of China Steel? I bet it is not Mr Xue if not it will be an interested person transaction. But can it possible that Mr Xue sold off his interests in Yilida Steel Mill  thru the restructuring exercising of China Steel or the name just happen to be the same by chances?

3) Financial engineering? China Steel is incorporated in Singapore but as given by the announcement, the acquisition price paid by China Powerplus is at a PE of 8.5X. Not too expensive but what that price is about 13X NTA of China Steel. Which also mean that the ROE is 150%. Extraordinary ROE for a company manufacture steel. Anyway cut the crap, it can’t be happen unless there are major financial engineering(almost the norm for all listed China companies) which mean that the NTA of China Steel is most likely be the working capital only, all major assets and perhaps cash are being hold back and lease to China Steel by the previous owner.

So who is that previous owner? Not a single disclosure here, perhaps it is not required then there is a loophole.

4) China Steel is going for an IPO soon, so if China Powerplus buy into it now, it is consider as a pre IPO investor or a company purchase the share at a cheap price. Sound good? But there is a “call option” in which if China Steel can’t get listed by 30 Jun 08, China Powerplus has the option to purchase another 20% of the interests from it successors. Well, it just look like China Powerplus is the backup of China Steel, if China Steel can’t get listed, China Powerplus will step in and purchase the additional 20% from someone. So this transaction is for whom? Shareholder of China Powerplus or those that are going to sell out of their interests in China Steel. Who are these guys? Institutional investors or the inner group of peoples who drink and play marbles together?

Forget about whether China Powerplus buying 30% of China Steel is a good move or will it fit well into the company, the whole thing look like an interested persons transaction where they are deciding who to keep which assets, who to involve and who to benefits from doing IPO. It seems obvious so the management and directors must be well prepared for all kind of questions during the EGM but there is no harm asking and see what are their reactions. And perhaps when it becomes too obvious, everyone assuming that other shareholder did their homework so in the end no one does the leg work and the EGM is passed without any question.

When their hands reached into shareholder pockets, hit it hard and let them know.

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Responses

  1. For (1), my understanding is that this acquisition DID NOT involve Lehman Brothers as ordinarily if it did, it would have been disclosed in the announcements. Also for the appointment of Lehman Brothers, my understanding from the mgmt is that it was a project basis appointment meaning Lehman will be paid only if something fruitful materializes.

    However, I am also rather concern with the number of “Interested Party Transactions” the company has been making (since listing). All these transactions have been rather significant in absolute dollar terms. It seems each time the company amass a certain amount of cash it splurges on a purchase (read land, acquisition) that uses up a significant portion of the cash holdings. This most recent transaction will deplete the company’s cash holdings by ard 50% ($0.11 cash per share will be reduced to $0.05 cash per share after the acquisition).

    I am also not convinced that the company needs to buy a steel mill just to improve the quality of its product. What kind of explanation is that? Does that means that Boeing has to buy up all its suppliers so that it can produce better aircraft? The whole logic is screwed. The company is entering practically a non-core businesss. A deal with similar industry company would make better sense wouldn’t it?

    Zooming in on the proposed acquisition target, I would like to point out the following:

    (1) The other 50% ownership is unknown at the moment. Like what you’ve raised, is it a pure coincidence that Linyi Yilida Steel Mill is thus named?

    (2) In January 2004, then listed Hua Kok International Ltd (now known as Abterra) entered into a MOU to BUY a stake in China Steel from Jadefield Group Limited. However, I believe the transaction did not go through in the end. What happened to the deal? And why is the sale of China Steel resurrected now with a different SGX company?

    (3) From (2), I understand China Steel begun operations only sometime in Jun 2004. It’s history is short. Furthermore, only the latest year figures were presented. So how profitable has China Steel been over the previous 2 years it has been in operations?

  2. Hi Wee Sin,

    For Lehman Brothers part, thank you. Learn something here.

    For point 2)

    I don’t know about it.

    For point 3)

    Can I guess u get that idea from Hua Kok International? I think ur analysis is imcomplete because from China Powerplus announcement, China Steel net profit for year ended 30 Jun 2007 is RMB44.7 million while NTA was RMB 29.5 million. Ignoring any intangible assets and with the NTA lesser than NPAT, so either

    1) China Steel, holding company for Linyi Yilida Steel Mill was loss making since incorporated in 2004 until FY2007 which is it 1st profitable year. The only one of the two reasons I can think of when NTA is less than NPAT for a single year.

    2) China Steel is a “Shell” company all along since incorporated until it they decided to list or sell Linyi Yilida Steel Mill where all the “restructuring exercise” come in. Which is why NTA is lesser than NPAT.

    I thinks 2) is more likely(if not it is hard to explain why two years of losses follow by one year of extraordinary profit) and it is the usual route for many China Companies who choose to list here.

  3. I am getting really sick of this chicanery. I thought with the new major shareholders, that this sort of dealing and apparent shafting of minority shareholders would cease – obviously I was wrong. Who knows what goes on behind closed doors? I am not absolutely per se against related party dealings eg from what I could see the purchase of the land was at a discount and therefore it was not necessarily hugely material that directors had personally benefited hugely. However this latest deal has all the hallmarks of a “spin job”. To be honest even the reasons justifying the purchase don’t appear up to scratch here – they had to scrape the bottom of the barrel to come up with reasons I think. I’m sorry to say but I’m now looking for an exit point (which may be soon or not, as the market dictates); if you can’t trust management not to benefit at your expense, why are you in the stock, whatever the otherwise appealing metrics and potential? And leopards don’t change their spots.

  4. Donmihaihai,

    yes i deduced some of the information from the official statement issued by the then Hua Kok International. As for the NTA part, you raise a valid point but I would not want to speculate at this point.

    The other thing I would like to point out is that the agreement then was for an 8% stake in China Steel for slightly above S$3.6 million – i.e. ard S$13.5 million for a 30% stake. The company should be more transparent by releasing more financial information pertaining to the results of China Steel over the last 3 years rather than to have its own shareholders speculating. On this point, I think the company is a huge disappointment since listing.

    A couple of QUESTION MARKS
    (1) Why was the deal between Hua Kok and China Steel not consummated?
    (2) I note that one of the company’s director used to be on the board of Hua Kok as well?
    (3) Why did the company want to have the option to purchase an additional 20% of China Steel if it fails to list? In the announcement, one of the “benefits” stated was the supposed increase in market value of China Steel should it get listed (Note: I must say this sounds stupid to me particularly when the motivation is to ensure a steady supply of parts for the main business). If part of the objective was to realize profit, a rational decision should be to take up a 50% stake and push through the listing instead of waiting for the listing to fail before increasing the stake? Basically my feel is the whole announcement shows how poor the motive of the acquisition is.

  5. HUA KOK INTERNATIONAL LTD

    CONDITIONAL MEMORANDUM OF UNDERSTANDING

    Introduction

    The Board of Directors of Hua Kok International Limited (the “Company”) wishes to announce that the Company has entered into a conditional and binding Memorandum of Understanding (“MOU”) dated 3 January 2004 with Jadefield Group Limited (the “Vendor”) which is the legal and beneficial owner of the entire share capital of China Steel Pte Ltd (“China Steel”).

    China Steel will by 31 March 2004 (or such later date as the parties agree) be the legal and beneficial owner of the entire share capital of Linyi Yilida Steel Mill Co. Ltd (the “Subsidiary”).

    Under the MOU, the Company will purchase from the Vendor a number of shares in the issued and paid up capital of China Steel (the “Shares”) in consideration of a number of new ordinary shares in the current issued and paid up capital (the “Consideration Shares”) of the Company (the “Transaction”), such amounts to be subsequently determined by agreement in good faith between the parties, following satisfactory due diligence.

    About the Vendor, China Steel and the Subsidiary

    The Vendor is an investment holding company incorporated in the British Virgin Islands whilst China Steel is an investment holding company incorporated in Singapore.

    The Subsidiary will operate a steel mill which is expected to commence operations by June 2004. It will produce semi finished goods, such as steel bars, that is used by the construction industry. The annual production capacity is expected to be about 250,000 tons. Its intended target customers will be construction companies in Shandong Province, PRC.

    Rationale for and benefits of the Acquisition

    The Company sees a good potential in the steel production industry in China. The demand for steel is increasing in China due to China’s rapid developments and these developments need steel to build their factories and fabricate machinery and equipment. Currently, China is a net importer of steel.

    The acquisition, by exchange of shares, is an opportunity for a long-term investment in a fast-growing industry in China. In view of the anticipated high demand of steel in China which will likely sustain for a long time, and with anticipated future profit contribution, the Company expects the diversification into this investment would counter the weak construction sector in Singapore.

    Terms of the MOU

    The Parties agree, in good faith, to endeavour to negotiate and execute on or before 31 January 2004 (“Signing Date”) formal and definitive documentation in respect of the Transaction, which shall include a Conditional Sale and Purchase Agreement (the “Agreement”) between the Parties.

    The Company shall acquire on or before 30 April 2004 the Shares subject to the Agreement which the parties shall enter into and the fulfillment of conditions precedent under the MOU.

    The purchase price for the Shares shall be satisfied by the Company issuing and allotting to the Vendor the Consideration Shares as calculated by reference to the weighted average of the trading prices of the shares of the Company at the close of trading on the SGX Mainboard for the five (5) trading days immediately before the date of the MOU of 3 January 2004.

    The specific number of the Shares and of the Consideration Shares shall be determined by agreement in good faith between the Parties prior to the Signing Date upon the satisfactory completion of the due diligence exercise carried out by the Parties.

    Conditions

    The Purchaser’s obligation to sign the Agreement and any other formal and definitive documentation in respect of the Transaction shall be conditional upon the Vendor furnishing a letter signed by the Vendor’s solicitors certifying that the China Steel has entered into a formal, valid and binding agreement in respect of the China Steel’s acquisition of the Subsidiary on or before the Signing Date.

    The Transaction shall be conditional upon, inter alia:-

    · the results of legal, financial and operational due diligence investigations relating to the Vendor, China Steel and the Subsidiary to be conducted by the Company and its advisors being satisfactory to the Company in its absolute discretion;

    · the results of legal, financial and operational due diligence investigations relating to the Company to be conducted by the Vendor and its advisors being satisfactory to the Vendor in its absolute discretion;

    · the Company’s purchase of the Shares and its issuance of the Consideration Shares as payment, being approved by (i) SGX-ST in-principle for the listing and quotation of the Consideration Shares on the SGX Mainboard upon their issue and allotment in-principle being given and such approval-in-principle not having been withdrawn at the date of issue and allotment of the Consideration Shares; and (ii) the Company’s shareholders at an extraordinary general meeting of the Company, provided always that if the SGX-ST shall impose any conditions on the Vendor or the Company, such conditions shall be acceptable to the Vendor or the Company, as the case may be;

    · China Steel acquiring by 31 March 2004 the legal and beneficial ownership of the entire share capital of the Subsidiary.

    Financial Effects

    As of this date, the Company is unable to provide financial information on its impact on the earnings per share or the net tangible assets per share of the Company for the financial year ending 30 June 2004 as both parties have yet to determine the consideration for the Transaction. The Company will make further immediate announcement as and when appropriate.

    Interest of Directors

    None of the Directors of the Company has any interest, direct or indirect, in the above matter. As far as the Directors are aware, no substantial shareholder of the Company has an interest, direct or indirect, in the above matter and the Directors have not received any notification of any interest in the above matter from any substantial shareholders.

    General

    The parties to the MOU will in due course enter into formal and definitive documentation which will provide in detail the terms and conditions set out in the MOU in respect of the Acquisition. The Company will make further announcements in respect of the Acquisition as and when such definitive documentation has been prepared and executed.

    Submitted by Paul Lin, Director on 07/01/2004 to the SGX

  6. Hua Kok Enters China’s Steel Industry

    § Leveraging on Jadefield’s strong credentials and established reputation to make further in-roads into the PRC construction and related industries

    § Does not rule out the possibility of increasing its stake in China Steel

    Singapore, 28 January 2004 – Mainboard listed Hua Kok International Ltd (“Hua Kok”), an investment holding company in construction and construction-related businesses in Singapore, today announced that it has entered into a Conditional Sale and Purchase Agreement with Jadefield Group Limited (“Jadefield”) to acquire a stake in China Steel Pte Ltd (“China Steel”), following the Memorandum of Understanding entered into between Hua Kok and Jadefield as announced on 7 January 2004.

    Jadefield is the holding company of China Steel and is led by a group of prominent Singapore businessmen that includes Mr Lim Seck Yeow, Group Managing Director of recently listed China Food Industries Limited.

    Under the agreement with Jadefield, Hua Kok’s acquisition of a stake in China Steel is conditional upon China Steel’s successful acquisition of the entire equity interest in Linyi Yilida Steel Mill Co. Ltd, a steel mill company incorporated in the People’s Republic of China (“PRC”) with its principal place of business located in Shandong Province (“Linyi Yilida”).

    “We are pleased to enter into this partnership with Jadefield in China Steel through a Conditional Sale & Purchase Agreement dated 28 January 2004. In line with our corporate strategy of focusing on our core businesses in construction and construction-related businesses, we are glad to be able to tap the burgeoning demand for steel in the PRC market through our stake in China Steel.” said Mr Phillip Tan Teck See, Chief Executive Officer of Hua Kok.

    The PRC’s steel market has quickly become the world’s largest, and demand is set to soar during the next decade. Demand for steel in the PRC has more than quadrupled since 1980. The PRC consumed more than 130 million tons of steel in 2000, surpassing the United States to become the biggest market in the world. The PRC uses a mere 0.12 kilograms per dollar of GDP, or 92 kilograms per head, whereas Malaysia, for example, consumes 450 kilograms per head. According to the Korean Times dated 23 November 2003, “As China produces one fifth and consumes a quarter of the world’s steel, it is widely predicted that the country will develop into a leading player in the international steel industry.”

    With the focus on developing its core businesses, Hua Kok is making this investment in China Steel. Currently, there are few companies in the PRC which have obtained a license to operate steel mills.

    As the steel business is a highly regulated industry in the PRC, the barrier of entry to this business in the PRC is considered to be relatively high. It is anticipated that the demand for steel in the PRC will continue to increase, as the economy expands and the construction industry gears up for the 2008 Olympics.

    Therefore, being one of the few licensed companies to operate steel mills in the PRC, China Steel’s competitive advantage is that it is in a position to supply semi-finished goods to steel companies and construction companies in the PRC and elsewhere in the world, and Hua Kok’s investment in China Steel is intended to allow Hua Kok to penetrate the PRC steel market.

    Under the agreement with Jadefield, Hua Kok will issue to Jadefield 72 million new shares at the agreed price of $0.05 each. This is in exchange for an 8% stake, valued at S$3,600,000 in China Steel, upon its successful completion of 100% of the equity interest in Linyi Yilida, the Shandong steel mill company. Jadefield is the holding company of China Steel. Operations and steel production are expected to commence by June 2004. Linyi Yilida’s annual production capacity is expected to be about 250,000 tons for the first year.

    “By entering into a partnership with Jadefield, we are making further in-roads into the PRC construction and related industries. Being a well-established player in the construction business, Hua Kok stands to benefit from Jadefield’s strong credentials and reputation in the Shandong region. We will continue to evaluate our on-going investments and do not rule out any possibility of increasing our stake in China Steel in future or working with Jadefield in other areas.” added Phillip Tan.

    Hua Kok does not expect this investment to have a significant impact on its’ FY2004 (ending 30 June 2004) at this current juncture.

  7. Wee Sin,

    Appreciate you active contribution and apologies for any late reply.

    This post on China Power was started so that someone(hoegaandit?) will bang table during SGM or go to regulator which I intent to do neither. So far I think I achieved my objective as the number of reader jumped. At least someone out there is aware. Hope the traffic will drop in the future.

    Actually there are lot of questions like those provided by you but I never want to go further than the interested person transaction(potential?) as why invest in a company where the management cannot be trusted even if the valuation and business is low and good respectively.

    If someone out there reading this and thinking how horrible investing in China companies listed here is, with my limited experience, I would say don’t worry, the future is bright. Actually, interested person transaction does not happen to China company only, lot of Singapore company does it as well and some are those “big solid blue chip”. As for those investing in China companies listed post 2000, I would advise them to read the IPO prospectus, start with 1) history, 2) restructure exercise, 3) their business, 4) what they intent to do with the proceed. Lastly, don’t take those financial statements in IPO at face value as they are easily manufacture especially proforma statement.

    I am a big fan of China companies and with big part of my portfolio investing in them. And to those who say China companies are 2nd class, cannot be trust, I would like to say, ” there are always good and bad examples around” and ask, “how many of these companies you actually dig?”

  8. I found your blog on google and read a few of your other posts. I just added you to my Google News Reader. Keep up the good work. Look forward to reading more from you in the future.


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