A month ago we launched Project Vampire, urging investors to vote against the general issue mandate which allows directors to dilute shareholders' interests without a rights issue. We promised a fanfare for the first HK company to comply with our recommendations on restricting the mandate to international standards. And the prize goes to: Arts Optical. We hope that others will follow their example.

Arts Optical adopts Vampire
22 April 2003

One of the many ways in which management of listed companies can damage shareholder interests is to dilute them through non-pre-emptive share issues, meaning shares which are not offered to existing shareholders first. This can be particularly damaging when the shares are issued at a substantial discount to market, and the ability of management to choose shareowners in this way subverts the governance mechanism. Shareholders should govern management, not the other way around.

In Project Vampire, launched on 16-Mar-03, we urged all minority shareholders to vote against the general issue mandate proposed at all Annual General Meetings, unless the proposed mandate meets the following requirements:

  1. The mandate to issue shares for cash, other than by a rights issue, shall be in respect of not more than 5% of the issued shares a the time of the mandate
  2. The discount for shares issued other than by a rights issue shall not exceed 5%.
  3. The mandate to issue shares for other purposes, including acquisitions, shall be for not more than 20% of the issued shares

We promised a fanfare for the first company to comply with this proposal, which reflects the international best practice seen in the UK, where issuers and institutional investors agreed similar standards in 1987.

We didn't have to wait too long to find a winner. On 9-Apr-03, Arts Optical International Holdings Ltd (Arts Optical, 1120) announced its 2002 annual results, including its notice of Annual General Meeting. Resolution 7 is the general issue mandate, and it complies with the above requirements and provides an example that other companies would do well to adopt. Project Vampire has scored its first conversion, so give the boys in spectacles a round of applause for their far-sightedness.

Based on public disclosures, the company is held as to about 40.55% by Chairman Michael Ng Hoi Ying,  9.80% by his wife, 4.98% by his brother, 7.67% by Templeton Asset Management Ltd and 5.25% by Webb-site.com editor David Webb.

This is also the stock which we made our 2002 Christmas Pick, and so far (although it is still early in the year) they haven't let us down. The results came in with basic EPS of $0.284 ($0.279 fully diluted), beating our expectation of $0.26 per share. We tipped the stock at $1.87 and today it closed at $2.00, up 7.0%. In the same time, the Hang Seng Index has fallen 16.2% from 10,227 to 8,572 (excluding dividends).

It is worth noting that Arts Optical's EPS would have been even higher if it had not used part of an earlier year's general mandate to issue new shares to Templeton for cash in Jan-02, enlarging the share capital by 5.23%. Arts Optical appears to have learnt from that lesson by limiting this year's mandate, and you can't blame Templeton for taking candy when it was offered to them.

However, the subscription inflated the cash pile by $31.2m, and at 31-Dec-02, the company was sitting on net cash of $214.1m or about $0.57 per share, or about 2 years' profits. The board proposes a final dividend of $0.08 per share, making a total of $0.16 for the year, or a yield of 8%.

We have  urged the board to consider a special dividend in the next results, to allow each shareholder to invest the surplus money as they choose. When a listed company retains excessive amounts of cash, there is always the risk of bad investments being made.

The company has also recently set up a remuneration committee for the board comprising the two independent non-executive directors, and Finance Director Desmond Lee Wai-chung tells Webb-site.com that all the annual meeting votes will be conducted on a poll, 1-share-1-vote, in compliance with best practice and in line with Project Poll.

Obviously we benefit if Arts Optical continues to perform well, but so do all shareholders, and the same thing works in reverse. With a substantial investment in a listed company, we will take all necessary steps to encourage good governance, and failing that, to hold management to account.

Listing Rules

OK, so one company has met the recommended best practice for the general mandate, and we hope others will follow. Does that mean that the Listing Rules can remain relaxed in this respect? Certainly not. Any company that rises above the low standards set by the Listing Rules can still fall back in future, and minority shareholders are powerless to stop it.  So we still need tighter Listing Rules, and will keep pressing for that by encouraging shareholders to vote against the general mandate unless it meets our recommended best practice.

© Webb-site.com, 2003


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