Soft Focus
20 January 2000
After denying for several days that anything was happening, Cheung Wah Development's shares were suspended at 2.30pm on 6-Jan-00, just half a day after the last such denial, when the shares doubled from $0.61 to $1.33 in one morning. The shares had moved up from a 1999 year-end close of $0.305. Today, the reason became clear.
Japanese investor Softbank Corporation, which owns about 23% of Yahoo! Inc and 25% of E-Trade Group Inc, is taking over control of Cheung Wah by subscribing for 1,152.5m new shares at HK$0.18 each. Such is the fever surrounding this investor that Cheung Wah shares rocketed to $9.80, up some 32-fold for the year to date. More about that later in this article.
Chuang's pay day
Roll the clock back a bit, and it is interesting to note that the company first began to rumble back in September, when on 13-Sep-99 a private company called More Profit Securities Ltd (MPS) subscribed for 117m shares at $0.12 each, for total proceeds of $14.04m gross. This was a 15.5% discount to the 10-day average price.
MPS was owned by Chuang's Cutlery Holdings Ltd, which was owned as to 66% by Mr Alan Chuang Shaw Shee and 34% by his sister Mrs Alice Siu Chuang Siu Suen. Mr Chuang and Mrs Siu are the Chairman and Vice-Chairman of HK-listed Chuang's Consortium International Ltd, but this was a private investment. Chuang's Cutlery, as its name suggests, is a holding company for a group whose principal business includes the manufacture and sale of cutlery, as well as the trading of properties.
Cheung Wah had been approached by Mr Chuang rather than the other way around, and at 31-Mar-99 it's gearing level was only 16.8% so it didn't really need the money. The announcement stated:
"the Company intends to use the proceeds for general working capital and does not have specific purposes for the application of the proceeds. The Company intends to explore opportunities for future business co-operation with Mr Chuang".
On 3-Jan-00, the first trading day of the new year, and the day on which the price began to move, MPS cut its holding by 48m shares from 117m shares to 69m shares. It is not clear whether this disposal was on-market or private, as volume that day was 64.3m shares. Most notably, the disposal cut MPS's stake from 16.0% to 9.4%, putting it below the 10% disclosure threshold.
The remaining 69m shares now have a market value of $676.2m compared with a cost of $8.28m - a more than 81-fold gain in 4 months.
Yu wouldn't believe it
Cheung Wah was listed in 1990 and has not made a profit or paid a dividend since 1995. The company's business dates back to 1930 when it was founded in Guangzhou to distribute dyestuffs, and moved to Hong Kong in 1946. It acted as exclusive distributor of dyestuffs for German chemicals firms Bayer and Hoechst.
The founding Yu family owns some 291m shares which, following yesterday's surge, are now worth about $2.86bn (US$366m) compared with $89m (US$11m) at the end of 1999. They appear to have no lock-up restriction and are free to sell. What would Yu do?
In the first dealing by a director in some years, Mr Lawrence Yu Kam Kee, the chairman, sold 10m shares at $0.29 on 8-Nov-99. Volume that day was only 5.1m shares, so at least part of the deal was probably off-market. Whoever bought them must be smiling.
Softbubble
After the September placing to the Chuangs, and including interim results, Cheung Wah had net assets per share of about HK$0.271, or about $199m total. The net proceeds of the issue to Softbank will be about $200m, resulting in total net assets of $399m or $0.211 per share.
By valuing the shares at $9.80, the market is suggesting that the mere fact that Softbank will be calling the shots is worth about $9.59 per share, or HK$18.1bn (US$2.32bn). Think about it - no deals yet, no money, just $18.1bn for the Softbank name.
Speaking of names, Cheung Wah is soon to be renamed "Softbank Investment International (Strategic) Limited" which we think leaves something to be desired in the trendy world of short domain names. Is there a "(non-strategic)" version, we wonder?
Cheung Wah joins fellow tech-bubble companies Golden Power and Pacific Century Cyberworks. US Fed Chairman Alan Greenspan once testified that the pricing of internet stocks may reflect the principles of a lottery - namely that the public is willing to pay way over the odds with an expected negative overall return, just in the hope of holding one of the few stocks that succeeds and produces a big pay-off. The difference is, in a lottery, you are not normally wagering a meaningful amount of money, and we suspect the average return of some minus 50% from the lottery is somewhat better.
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