Pass the Portal
25 August 2002
So you thought dot-mania was dead? Not if you are running HK listed Can Do Holdings Ltd (Can Do, 0172) or the equally ridiculous-sounding eCyberChina Holdings Ltd (eCyberChina, 0254), which is on its sixth name since 1993. They still live in their own world of hyper-valuations and asset injections.
First investment
On 25-Sep-01, Can Do announced it was buying 30% of Masterful Resources Ltd (Masterful), a BVI company which owns Shipping-info.com, described as:
"a business-to-business web portal under development which aims to serve the shippers, forwarders, agents and carriers through the provision of network based information services, via the internet, to the participants in the shipping and logistics industry in Hong Kong, Shanghai and Tianjin of the PRC."
The price on that deal was HK$48m (US$6.15m), of which $21.2m was paid in cash and the balance by the issue of 107.2m shares in Can Do valued at $0.25 each. In fact, the market price of the shares was then only $0.07, but the law prohibits the issue of shares below par value, which in this case was $0.25. If we value the shares at market price, then they were only worth $7.50m and the total consideration was $28.7m. The new shares constituted 12.4% of the enlarged issued ordinary share capital.
The vendors were Richard Cheung Chung Leung (Mr Cheung), who sold 15% of Masterful and owned 70% after the deal and Lim Siok Ching (Ms Lim), who sold her entire holding of 15%. Both were described as "independent third parties". The announcement doesn't give any further information on these people, but we can tell you that Mr Cheung has been an Executive Director of HK-listed Singapore Hong Kong Properties Investment Ltd (0245) since 25-Sep-98 and is a Registered Architect. He was also a director of China Bio-medical Group Ltd (0140) until 30-Sep-00, and has been an independent non-executive director of Tomorrow International Holdings Ltd (Tomorrow, 0760) since 31-Mar-00. We don't know anything about Ms Lim.
The price was based on a valuation of HK$160m by LCH (Asia-Pacific) Surveyors Ltd (LCH) as at 31-Aug-01, this despite the fact that Masterful was only incorporated on 2-Jan-01 and had shown a net loss of HK$5,304 up to 13-Sep-01, according to management accounts. The deal was completed on 3-Oct-01.
The circular to shareholders dated 15-Oct-01 disclosed that net assets at 13-Sep-01 were just HK$384,696, which means that the initial capital was just HK$390,000 (US$50,000) and the company was being valued at 410x invested capital. The balance sheet at that date comprised "mainly deposit paid to a subcontractor for the development of Shipping-info.com". There were no liabilities. Mr Cheung was "responsible for the day-to-day management and operations of Masterful" but there was no suggestion that he knew anything about shipping.
Can Do was advised on the transaction by Deloitte & Touche Corporate Finance Ltd. At the time of the circular, the largest shareholder of Can Do was Tem Fat Hing Fung (Holdings) Ltd (TFHF, 0661) with 22.73%.
Second investment
You can never have too much of a good thing. On 13-Dec-01, Can Do announced it would buy a further 19% of Masterful from Mr Cheung, at the same valuation as before, for a price of $30.4m, of which $23.5m was in cash and the balance of $6.9m was satisfied by the issue of 27.6m new shares at par of HK$0.25. The company said:
"since the Group's acquisition of the 30% interest in Masterful Resources, the development of Shipping-Info.com has been progressing in accordance with the business plan. The Directors are satisfied with the performance of Masterful Resources' management. Together with the entry of the World Trade Organisation by the PRC lately, the Directors consider that further investment in Masterful Resources will have a promising prospect and will enable to enhance the Group's overall performance"
The market price of the shares was $0.106, so their market value was $2.93m, taking the total consideration to $26.43m.
Rights issue
The $23.5m cash for the second investment was paid to Mr Cheung out of the proceeds of a 2:5 rights issue at par value of $0.25 per share which had just completed a week earlier. It was 100% under-subscribed - not a single shareholder took up their rights, as the issue was above market price. When the issue was announced, the issue price was 220.5% above the market price of $0.078 per share.
As a result, the underwriter, a company owned by George Chan Yuen Ming (Mr Chan), took up all the 344.48m rights shares for $86.12m, giving him 28.57% of the enlarged ordinary share capital, and diluting TFHF to 16.24%. Remarkably, Mr Chan had no intention to appoint any representative to the board of Can Do. If the name rings a bell, that's because Mr Chan is the brother of Jimmy Chan Yuen Tung, who featured in our article on Digital World last month.
The announcement of the rights issue said that Mr Chan:
"is engaged in the provision of loan financing to both listed and non-listed companies, including [Can Do] and [TFHF]. As at the date of this announcement, total indebtedness owing by [Can Do] to Mr Chan amounted to approximately HK$89million"
That gives you some idea of why Mr Chan was willing to invest in Can Do - he had already lent them a similar amount of money, although the announcement stated that the rights issue would be settled in cash and not by offsetting Can Do's indebtedness to him.
Mr Chan is also the controlling shareholder of Tomorrow, of which Mr Cheung, as we mentioned earlier, is an "independent" non-executive director. Mr Chan is not a director of Tomorrow despite owning 61.44% of the company at 31-Dec-01.
Write-off
On 26-Jul-02, in the results for the year ended 31-Mar-02, Can Do wrote:
"The services provided by Shipping-Info.com were only launched in end of May 2002. Owing to the current unfavourable economic atmosphere, the result of the initial operation has not been satisfactory and is still under review. To adopt a prudent approach, a full provision of the carrying value is made in the current year. However, the Board is of the view that it would provide positive contribution in the future and will closely monitor its performance. Should the result of operation be improved, the Board will consider reversal of the provision made."
As a result, Can Do wrote off the amount of HK$78.4m, being the total book cost of the 49% stake in Masterful.
Pass the Portal
But all was not lost. On 12-Aug-02, eCyberChina announced the proposed purchase of the 49% stake in Masterful from Can Do for HK$56.8m, satisfied by the issue of 284m shares at par value of $0.20 each. Conveniently, the shares represent 9.9% of the enlarged issued share capital of eCyberChina, just less than the 10% disclosure threshold, and are not subject to any lock-up.
Although the eCyberChina shares were to be issued at par value of $0.20, they are worth considerably less in the market. On 31-Jul-02, they plunged 84.5% from $0.116 to $0.018 in 47 minutes before being suspended. On that basis, the deal would be worth only $5.1m.
The $56m price on the deal was based on a "preliminary value" of Masterful of HK$116m as at 9-Aug-02 by LCH (yes, them again). From the date of incorporation until 31-May-02, Masterful had now lost HK$53k and no further capital had been invested beyond the original HK$390,000.
No ships in site
And what about the portal? Well, we registered as a user and took a look around. You don't get much for $116m. The form-driven "Sailing Schedule" showed no ships to Long Beach (the biggest port in the US) between today and the end of 2002, or any year up to 2010 for that matter, despite claims that the portal has been operating since May-02. So then we tried Amsterdam, Felixstowe, New York and Panama. Nothing. Not a boat in sight.
Incidentally, it is rather puzzling that the form does not invite the user to select a port of departure, only a port of arrival. The "Cargo Tracking" page just links to the web sites of individual shipping lines. The "Shipping Directory" is just a 35-page list of HK shippers in alphabetic order with no search function. There is no visible advertising and registration is "totally free of charge" so it is not entirely clear where the revenue is in this model!
It looks like Mr Cheung and Ms Lim got rather a good deal - they invested HK$0.39m in a dysfunctional portal and received $44.7m in cash and 134.8m shares in Can Do with no lock-up which may have been sold at any time, and Mr Cheung still keeps majority control of Masterful. Meanwhile, the parcel is passed to eCyberChina, if they are satisfied with their due diligence.
The Shipping-info.com transaction is just one of several by Can Do and eCyberChina separately that have destroyed shareholder value. The other deals are beyond the scope of this article, but the message to shareholders of Can Do and eCyberChina is simple: abandon ship.
© Webb-site.com, 2002
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