Bill Gates, as trustee of his US$27bn foundation, has made late disclosure of holdings in 2 HK-listed stocks which spiked 38% and 17% on the news. We'll tell you who the foundation is probably dealing with and what else it might own, but don't get excited - Mr Gates has better things to do than pick Chinese small-caps.

Gates' Way to China
9 August 2004

Bill Gates, as the trustee of the Bill and Melinda Gates Foundation, has made his first disclosures of interests in the shares of two small HK-listed companies, Ocean Grand Chemicals Holdings Ltd (OGC, 2882), and H-share Beiren Printing Machinery Holdings Ltd (BPM,0187). For our overseas readers, an H-share is a HK-listed stock issued by a mainland-China incorporated company.

Late disclosure

Under Section 325 of Hong Kong's Securities and Futures Ordinance, persons who become interested in 5% or more of a class of listed shares must disclose their interest within 3 business days (bizarrely including Saturdays) of the transaction date, or within 3 business days of the date on which the relevant event "comes to his knowledge" if later.

Mr Gates' disclosure of 5.38% of OGC and his disclosure of 7.08% of the H-shares of BPM were not published until 3-Aug-04, having been filed with the Stock Exchange on 26-Jul-04. SEHK has not publicly explained what caused the delay, which was reportedly due to missing details on the submission.

The actual purchases were made on 2-Jul-04, although the filings claimed that Gates did not "become aware" of the event until 10 days later on 12-Jul-04. So much for Business @ the Speed of Thought. Even if you accept that "awareness" date as your starting point, the filing would have been due by 15-Jul-04, but was not made until 11 days later and then was apparently not complete enough to be published, so in our view, it doesn't count. It was not until 32 days after the original transactions that the disclosures were finally published.

This is not the first time that Mr Gates has had discloseable interests around the world. He is a very experienced investor and as the world's richest man he has probably the world's largest private portfolio under his control. The Gates Foundation alone had investments of US$26.4bn at the end of 2003. He has also been steadily selling Microsoft shares for years to diversify his portfolio, including investments held through a wholly-owned vehicle, Cascade Investment LLC, which sometimes invests in parallel with the foundation.

While the Gates Foundation has commendable charitable activities, it also has the benefit of legally avoiding tax on the disposal of the Microsoft shares with which it was endowed, at the same time as giving him a tax deduction for the donation (which he can probably use to offset income from his other investments), and whilst still allowing Gates ultimately to control the investment of the assets as trustee.

Not the first time

Gates has had previous disclosure problems. In May-04, he was ordered by a Federal District Court to pay a civil penalty of US$800,000 for violating the reporting requirements of the Hart-Scott-Rodino Pre-merger Notification Act. The violations were caused by acquiring stakes in two US companies. In the first case, not unlike the present situation, he "discovered" the violation after the 2-Nov-01 purchase which took him over 10% of Republic Services Inc, and then made a filing 14 days later. The Federal Trade Commission (FTC) issued a warning letter at the time, stating that it would not ask for fines for a first offence, but that he:

"is accountable for instituting an effective program for entities he controls to ensure full compliance with the Act's requirements".

Six months later, on 9-May-02 he committed the second violation involving a purchase of shares in ICOS Corporation, of which he was a director.

Unfortunately, it appears that any compliance program instigated after the FTC action did not extend to "an effective program" for ensuring compliance with overseas securities laws. It will be interesting to see what action our own Securities and Futures Commission takes, if any, to prosecute Mr Gates for late disclosure.

Bill in a China shop?

With a portfolio in the tens of billions, readers will realise that small investments like a US$3m stake in OGC are not something that Mr Gates can spend even a second thinking about. If he has made any decision at all, it would only be to put some of the foundation's equity portfolio into Chinese stocks. Anything more detailed would be delegated to a portfolio manager, either internal or external to the foundation. We think we know who.

A close analysis of the disclosures by Webb-site.com shows several things:

Let us pause to explain that a "security interest" is obtained by a person when stock is pledged to them as collateral, normally for a loan.

Regulatory note: as an aside not relevant to this story, banks and brokers are exempt from disclosure obligations on security interests, which means that the investing public has no idea when a controlling shareholder has pledged his soul and stock to the devil who is about to foreclose and burn the company's stock price to the ground. The Government should scrap this exemption. It is also often abused by certain brokers who have de facto control over a listed company via the controlling shareholder, causing the company to engage in strangely uncommercial transactions even though it is apparently independent from the broker.

Anyway, for some reason, UBS AG either is not exempt or does not take advantage of this exemption. It may have something to do with being a holding company for the entire group rather than a bank itself. Several of its disclosures were also filed long after the relevant events.

But there's more. UBS AG is the holder of investment quota - the right to invest in mainland-listed "A" shares under the Qualified Foreign Institutional Investment (QFII) scheme of the China Securities Regulatory Commission. Such stocks are normally only available to domestic investors due to the PRC's capital controls. UBS AG provides access to this quota to institutional clients, one of which is the Martin Currie China Hedge Fund (MC), managed by Shanghai-based Chris Ruffle of Edinburgh-based Martin Currie Ltd. Ruffle declined to comment on the situation.

Martin Currie reached 5.09% of OGC on 14-Oct-03, and also went over the 5% threshold in BPM on 14-Oct-03, rising to 7.26% by 8-Jan-04. Disclosure requirements are based on whole percentage boundaries, so as there have been no subsequent disclosures, we know that Martin Currie still has an interest in between 5-6% of OGC and 7-8% of BPM.

What this suggests to us is a strong likelihood of the following scenario:

So what else could they be into?

Our research indicates that Martin Currie is currently interested in more than 5% of the following HK-listed stocks. So if we are right about the relationship with the Gates Foundation, then some or all of these stocks may also be in the foundation portfolio, but below the 5% threshold. A number of them are GEM stocks acquired by MC at or near the IPOs:

It's a fair bet that the foundation does not hold any Leroi Holdings Ltd (0221) as this has been suspended since 27-Feb-04 pending an ICAC investigation.

The Gates Foundation recently received QFII approval to invest in mainland A-shares, so Martin Currie may also be working on that alongside their own funds.

OK, so now you have some idea of what is probably going on. But this is NOT a reason to go out and buy any of the above-named stocks. We make no comment on their investment merits or demerits, and neither does Bill Gates - he probably doesn't know anything about them. When OGC shot up 38% in reaction to the disclosure, whoever manages the foundation's portfolio reacted quite rationally, and sold stock, cutting the holding back below the 5% disclosure threshold. And for once at least, Gates' disclosure was on time.

© Webb-site.com, 2004

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