Ordinary Gweilo

The South China Morning Post has two stories today that should serve as a warning to anyone thinking of buying shares in Hong Kong companies.

The first story is about Akai Holdings – a highly confusing conglomerate that was run as if it was a private company.  As Business Week explains: 

Akai Holdings alone consisted of more than 160 subsidiaries that ceaselessly shuffled assets and cash. As the Hong Kong liquidation investigation drily concludes, Akai’s structure seemed “deliberately and unnecessarily complex.”

The minority shareholders knew little and probably didn’t care as long the dividends were paid and the share price went up.  Then suddenly most of the key operating units were transferred to Grande Holdings Inc. (founded by Stanley Ho) and the company became insolvent.  When Akai was wound up it had “no business, staff or premises” and its liabilities were more $lbn.  

The only asset Akai had was its listing on the Stock Exchange, which the liquidators agreed to sell to retailer Hang Ten in return for cash and equity in the new group. However, according to the SCMP, the controlling shareholder of Akai Holdings, James Ting, threatened to block this sale but was persuaded to withdraw his opposition in return for a promise that the liquidators wouldn’t sue him. On its front page the SCMP describes the deal thus:

Tycoon James Ting is let off a debt of more than US$1bn owed to creditors of Akai Holdings under a deal with the liquidators.

I may be mistaken, but surely the whole point of a joint stock company is that the shareholders’ liability is limited to the value of their shareholding. If the company goes into bankruptcy you can’t sue the shareholders for your money! So I really don’t see how anyone could say that Mr Ting “owed” the creditors $1bn.

Of course, if the liquidators think that Mr Ting (or anyone else) did something untoward, they could sue him. Given that the Official Receiver expressed concern about alleged asset-stripping and the transfer of its consumer electronics business to Grande, that must have been a possibility. The problem is that these things are difficult to prove, and it would probably have cost a small fortune in legal costs, so the liquidators probably made the right decision. 

The moral of this story is that being a small shareholder in a Hong Kong company is a risky business.  As David Webb never tires of pointing out, corporate governance is a rather novel idea here, and most companies are run with little concern for their minority shareholders.    

Which leads me on to another story in today’s SCMP.  The chairman of Wharf has bought a 39% stake in City Super from, er, Wharf, which had earlier acquired the business from Wheelock (part of the same group). At least bigger companies are more transparent, but juggling assets between companies (and especially with individuals connected with the company) is obviously open to abuse.  Wharf is also City Super’s landlord in Harbour City and Times Square.

UPDATE: More details on this transaction from Spike magazine

The 39.1 per cent stake in City Super held by Wharf was sold to Joyce Boutique Holdings, which in turn is 52 per cent-owned by Peter Woo, the Wharf chairman. As recently as February of last year this City Super stake was sold to Wharf by its parent company Wheelock. Wheelock had bought the stake from Wharf in 2000.

This seems to be a bad case of asset-shuffling compulsive behaviour. Wharf’s explanation for the sale of the company to its chairman hardly helps investors to understand what’s going on. The company claims that it only ever bought the original stake in City Super to make sure that it would become an anchor
tenant for the Wharf-owned shopping malls at Harbour City and Times Square. It says that this objective has now been achieved and it is reluctant to take on the responsibility for the further expansion of the company.

That kind of makes sense, except that if Wharf really did not want any further involvement with City Super why on earth did it buy the company just one year ago? By then City Super was an established tenant in its property and presumably was looking to expand its business.

Actually, I ‘m not sure that it does quite make sense. Times Square was built ten or more years ago, and City Super moved into the basement below Lane Crawford about five years ago, so it can hardly have been an ‘anchor tenant’. That honour would go to the likes of Lane Crawford and Marks & Spencer.

Meanwhile, Hopewell have been denied planning permission for their mega-hotel project in Wan Chai.  They will appeal, but they have also threatened to go-ahead with a 93-storey hotel at the same site – for which they have previously been granted permission.