Luxury watch deal builds on Hong Kong shell pile

Hengdeli Holdings

01/03/2017 02:29

(The author is a Reuters Breakingviews columnist. The opinions 
expressed are her own.) 
    By Lisa Jucca 
    HONG KONG, March 1 (Reuters Breakingviews) - Retailer 
Hengdeli  3389.HK  wants to add another shell company to Hong 
Kong's growing pile. By selling its top-end China watch shops to 
its chairman, it will leave stakeholders like Swatch  UHR.S  and 
LVMH  LVMH.PA  with a gutted listed entity. Forcing a buyout - 
or killing the deal - would protect minority investors and send 
a strong signal. 
   The rising tide of asset-light listed companies is a headache 
for regulators in the financial centre. In addition to sticking 
minority investors with shares in companies they can't easily 
trade, such shells make attractive targets for companies seeking 
to evade scrutiny of an ordinary IPO process: a recipe for 
accounting scandal. Nearly 140 such shells changed hands in Hong 
Kong between 2013 and mid-2015, Reuters reported; regulators 
said late last year they had set up a dedicated task force to 
address the issue.  
    Hengdeli's proposed deal will test how serious this task 
force is. The company said on Dec. 30 it would sell units 
producing about 80 percent of its revenue for 3.5 billion yuan 
($509 million) to chairman Zhang Yuping, its top shareholder. 
Investors would take a special dividend of HK$0.2 per share for 
a stock that was trading around HK$1.2 when the announcement was 
made. The listed unit would be relieved of much debt with some 
cash left over.  
    Yet the shrunken Hengdeli would have only a handful of 
retail outlets left to its name, and no claim to revenue from 
more than 400 Chinese shops, even as depressed luxury watch 
sales show signs of recovery there.      
     Swatch and LVMH may swallow the transaction to preserve the 
China retail partnership. But smaller investors including 
Lombard Odier, Vanguard and BlackRock  BLK.N  would be stuck. It 
was only last February when BlackRock complained about a plan by 
 Hong Kong-listed gold miner G-Resources  1051.HK  to sell off 
the mine producing almost all of its revenue, yet leave its 
ticker trading. Regulators still let that deal go through.  
    Graphic: Shell-shaped: http://reut.rs/2lRezbk 
    Giving minority investors a clean exit via a full takeover 
is vastly preferable. Regulators have the right to reject deals 
that threaten the long-term viability of a company. Hong Kong 
has little to gain by allowing a new shell to drift. 
     
    On Twitter https://twitter.com/LJucca 
     
    CONTEXT NEWS  
    - Luxury watch retailer Hengdeli, listed in Hong Kong with a 
market cap of HK$5.8 billion ($747 million), announced on Dec. 
30 in filings to the stock exchange a private transaction that 
would see its chairman and top shareholder Zhang Yuping 
acquiring the company's entire mainland retail and wholesale 
businesses as well as 75.5 percent of Hong Kong retailer Harvest 
Max. Zhang owned a 33 percent stake in Hengdeli at the time of 
the announcement.  
    - Under the terms of the proposed transaction Zhang will pay 
3.5 billion yuan ($509.5 million) in cash for the assets. A 
special dividend of HK$0.2 per share will be distributed to 
shareholders. The listed entity will retain some retail shops in 
Hong Kong and Taiwan. 
    -Hengdeli published a profit warning on Feb. 13, saying it 
expected to record a loss attributable to equity holders of 322 
million yuan for the fiscal year ended Dec. 31 2016.  
    - Swatch is Hengdeli's top shareholder with a 9.2 percent 
stake. Other international investors include LVMH, also a 
partner for watch distribution, with a 6.4 percent stake. 
Lombard Odier, the Vanguard Group and BlackRock hold smaller 
stakes according to Eikon data. 
    - Hengdeli has yet to provide shareholders with the full 
details of the proposed sales agreement, which will be put to 
shareholders at an extraordinary general meeting. The company 
has twice postponed publication of further details.  
    - The Securities and Futures Commission hired a new head of 
enforcement in May 2016. In a speech in November, SFC Chief 
Executive Ashley Alder said shell manufacturing was a problem, 
in particular at the small-cap Growth Enterprise Market. In its 
bi-annual enforcement newsletter published in December, the SFC 
said it had created a task force to look into the problem of 
shell companies at GEM.  
    - Rules governing the listing of securities on the Hong Kong 
Stock Exchange state that an issuer shall carry out a sufficient 
level of operations or have tangible assets and/or intangible 
assets for which a sufficient potential value can be 
demonstrated to warrant continued listing. 
    - For previous columns by the author, Reuters customers can 
click on  JUCCA/  
    - SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS: http://bit.ly/BVsubscribe 
 
($1 = 6.8696 Chinese yuan renminbi) 
 
    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 
Hengdeli announcement    http://www.hkexnews.hk/listedco/listconews/sehk/2016/1230/LTN201612301149.pdf 
  
Fitch Places Hengdeli on Watch Negative after Proposed Disposal  
   urn:newsml:reuters.com:*:nFit985789 
Who's next? Asia investor activism set to grow after BlackRock 
public campaign      urn:newsml:reuters.com:*:nL4N16G3GJ 
Tencent deal throws spotlight on backdoor listings    
www.reuters.com/article/us-hongkong-shellcompany-idUSKCN0PD01F20 
150703 
BREAKINGVIEWS-HK listing crackdown is warning to Chinese banks   
   urn:newsml:reuters.com:*:nL5N1F8066 
BREAKINGVIEWS-External vetting is best fix for HK IPOs     
 urn:newsml:reuters.com:*:nL4N1FN0TI 
BREAKINGVIEWS-BlackRock picks its battle with Hong Kong protest  
    urn:newsml:reuters.com:*:nL4N16F1AX 
Graphic: Shell-shaped    http://reut.rs/2lRezbk 
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> 
 (Editing by Pete Sweeney and Kathy Gao) 
 ((lisa.jucca@thomsonreuters.com;)(Reuters 
Messaging:)(lisa.jucca.thomsonreuters.com@reuters.net)) 
 
Keywords: HONGKONG HENGDELI/BREAKINGVIEWS