Timeless Property
31 December 1999
Traditionally the period during major holidays, such as the 3-day week between Christmas and New Year, is the time for companies to get their worst results out and slip in a few dodgy transactions before the year-end. This year was no different. The theory is that yesterday's news gets thrown away with the newspapers and by the time you return from your holidays you won't hear about it.
So it comes as no surprise that the last trading day of the millennium sees the first listed "technology" company on GEM spend 40% of its listing proceeds on.... property. As the company had minimal net assets before the IPO, the consideration also amounts to 37% of Timeless' post-IPO net assets.
In yesterday's announcement , Timeless Software said that it is buying the 79th floor of "The Center" at 99 Queen's Road, from major developer Cheung Kong (Holdings). This brand new building is actually nearer Sheung Wan than Central but we won't quibble - whoops, we just did.
The price is HK$178,375,500 for a gross floor area of 13,213 sq ft. That works out at exactly $13,500 per sq ft. The Center is one of the tallest buildings in Hong Kong and the views from the 79th floor will be spectacular, but so is the price. Most software systems companies are content to rent decent offices with good communications in areas like Kwun Tong or Quarry Bay at around $10-15 per sq ft per month.
They could buy that space for about $4,000 psf. Even floors in the Lippo Centre in Admiralty, with sea view, would probably only fetch about $8,000 psf. So Timeless is paying top dollar for top-floor office space - and the lease on its old office in China Resources Building still has a year to run. This company is becoming less of a software services company and more of a property speculator.
Completion is scheduled for 31-Mar-00 but Timeless can extend this to 30-Jun-00 if interest is paid at Prime rate. 30% was payable in cash up front, 20% is payable by completion date "by cash or such other form or manner as may be mutually agreed" and 50% in cash on completion.
The wording of the second instalment here is a reference to the GEM Rule against issuing any new shares for 6 months following the listing date (25-Nov-99) which would take them up to 25-May-00. But don't get excited, even if the 20% was satisfied in Timeless shares at current levels, this would only amount to about 1% of the issued share capital of Timeless. So this would not be a strategic stake for Cheung Kong. For them, this is just a handy way to book some more profit before the 31-Dec year end.
Weak justification
The announcement states that the transaction "allows the company to strengthen its business relationship with Cheung Kong with opportunities to provide IT and internet related services" but the agreement does not, as far as we know, relate to any such thing. Um right... so if we buy a washing machine from Fortress (owned by Hutchison), does that strengthen our business relationship with them with a view to providing financial commentary?
The purchase price represents 40% of the IPO proceeds. In the "use of proceeds" section of the prospectus, $250m was allocated to specific purposes (including $100m for acquisitions) and the balance of $200m was for "working capital". Fixed assets such as office property are hardly working capital, and we think this amounts to a change in use of proceeds, just one month after the IPO, which was sponsored by ING Barings.
In an article last month Webb-site.com warned readers before the IPO about the inflated valuation on Timeless, which is just a software systems integrator. After reaching $7.70 on the first day of trading, the shares fell to $3.575 on 29-Dec-99 before rebounding 26% yesterday to $4.50. That leaves the company valued at $3.38bn, or 121 times Mar-00 forecast earnings (weighted average) or 167 times fully-diluted earnings, or 78 times last year's turnover (44% of which came from Y2K work, what you might call a sunset industry). Moreover, at 7 times net asset value it is about 10 times over-valued as a property investment vehicle.
So take your pick - is it a software systems integrator or a property investor? Either way this stock cannot be worth more than $0.50-0.70 on fundamentals.
© Webb-site.com, 1999
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