The Convoy Financial-Finsoft-Hanergy connection and aggressive accounting

Some bubbles for New Year
31st December 2014

The HK stock exchange shut at noon today, so let’s take a New Year’s Eve virtual stroll around the market. We’ll start with Finsoft Corporation (Finsoft, 8018), which ends 2014 as the 9th largest company by market value on the GEM board, at HK$4940m. We’ll then explain how that is connected to financial advisory firm Convoy Financial Holdings Ltd (Convoy, 1019) and to a closed-end investment company, China New Economy Fund Ltd (CNEF, 0080). Finally, we’ll make a special mention of Hanergy Thin Film Power Group Ltd(Hanergy, 0566), a HK$117bn (US$15.1bn) bubble at today’s record daily high of $2.81, which makes it the 38th largest HK-listed stock.So pour yourself a glass of bubbly and enjoy…

About Finsoft

Finsoft was listed on 26-Sep-2013 after a placing of 50m shares (25%) at HK$0.82 each ($0.082 split-adjusted), raising $41m gross but only $28.6m after expenses. The announcement of allotments and concentration warning shows that the top 10 placees took 96% of the deal (24% of Finsoft) while 149 placees owned a combined 1% of Finsoft. On day one, the depository (CCASS) positions looked like this.

At listing, the principal business of Finsoft was “the development, sale and lease of financial trading software solutions” to stockbrokers and banks in HK. The main subsidiary, iAsia Online Systems Ltd (iAsia (BVI)), was incorporated on 9-Jan-2001 and was listed before, as a subsidiary of what was then called “iAsia Technology Ltd” and is now called Value Convergence Holdings Ltd (VC, 0821). VC was first listed on GEM on 9-Apr-2001. On 19-Mar-2004, having acquired a financial services business and become a subsidiary of Melco International Development Ltd (Melco, 0200), VC sold the original loss-making iAsia group, including iAsia (BVI), to Melco for HK$27.9m. Skip forward 5 years, and on 23-Feb-2009, Melco sold 80% of iAsia (BVI) to Ringo Chan Sek Keung (Ringo Chan) for HK$12m, payable in 3 installments over 2 years, with a call option to buy the remaining 20% for HK$3m, which he exercised on 14-Jul-2010. So the whole business cost him HK$15m.

Earlier, Ringo Chan was the founder in 1998 of a company called “Wafer Systems Limited”, a network systems integrator which listed on GEM on 17-May-2002 and in 2007 was taken over by Melco, now known as MelcoLot Ltd (8198).

Two and a bit years after buying iAsia (BVI) from Melco, Ringo Chan began preparing it for listing. On 26-Nov-2012, he injected iAsia (BVI) into a new empty BVI shell, Luster Wealth Ltd (Luster Wealth) and reduced his holding to 85% by allocating 15% to 4 members of management, of which 6.5% each went to Chief Technology Officer Samson Lai Wai Ho (Mr Lai) and Chief Operating Officer Li Hoi Kong, and 1% each to 2 senior managers. The next day, Ringo Chan sold 7.5% to “strategic investor” Kwok Shun Tim (Mr Kwok) for HK$2.4m, implying a valuation of $32m for the group, or $0.0213 per Finsoft share today (split-adjusted).

10 months later in the IPO, the Finsoft shares were valued at almost 4 times that, but you ain’t seen nothin’ yet. With such a concentrated ownership, the price was easily ramped by persons unknown, closing at $5.23 ($0.523 split-adjusted) on 26-Sep-2013, its first day of listing, up 538% from the placing price. That valued Finsoft at HK$1046m, or about 93 times the profit it made in 2012, 26 times its net tangible assets and 25 times the value when Mr Kwok invested 10 months earlier. Post-listing, Luster Wealth owned 69.38%, Mr Kwok owned 5.63% and the “public” owned 25% of Finsoft.

But you still ain’t seen nothin’ yet.

On 24-Jan-2014, CTO and ED Mr Lai resigned to spend more time with his family. You might wonder what happened to his shares in Luster Wealth, so read on. On 2-May-2014, Finsoft shares split 10:1. On 19-May-2014, Ringo Chan sold 9.6% of Luster Wealth (96 shares) to 2 unnamed purchasers in unspecified proportions, for HK$49,284,000, which represents $0.37 per split Finsoft share. The closing market price that day was $0.70. Ringo Chan then owned 75.4% of Luster Wealth. 4 weeks later, on 17-Jun-2014, Luster Wealth distributed the underlying Finsoft shares to two of its shareholders by repurchasing their Luster Wealth shares. Prior to that, “Shareholder A” and “Shareholder B” held 9.5% and 6.6% of Luster Wealth respectively. As a result of the repurchase, “Shareholder A” held 131,812,500 shares (6.59%) of Finsoft, and “Shareholder B” owned 91,575,000 shares (4.58%).

“Shareholder A” is Convoy

Finsoft didn’t say who Shareholders A and B were, but in the case of “Shareholder A”, as it owned over 5% of Finsoft, it had to make a filing made 3 days later which shows that it is a 100% subsidiary of Convoy, which appears to have deposited the shares into CCASS on 2-Jul-2014 via Sun Hung Kai Investment Services Ltd, and has been steadily selling since then, cutting below 6% on 25-Sep-2014 but still owning at least 5% (100m shares).

After the distribution of Finsoft shares to Convoy and Shareholder B, the price took off again, rising from $0.53 on 17-Jun-2014 to a high of $2.51 on 26-Sep-2014, the first anniversary of listing. At today’s closing price of $2.47, Finsoft is valued at HK$4940m (US$637m), or about 110 times its net tangible assets of $45.0m at 30-Jun-2014, so the downside is huge. We deliberately waited until this afternoon to publish this article, to see how far whoever is manipulating the stock would push it at the year-end, when portfolio valuations count. The answer: up 12.3% today, up 20.5% in 2 days and up 44.4% this month.

In Convoy’s interim report for the 6 months to 30-Jun-2014, it booked a net profit of HK$130.5m, but note 4 shows that this was almost entirely due to $125.9m of “fair value gains on equity investments”. Note 13 shows listed equity investments of HK$246.2m.

Based on a holding of 131.8125m shares in Finsoft at the closing price of $1.37 on 30-Jun-2014, these were valued at $180.6m, or 33.0% of Convoy’s net tangible assets of $547.0m. As we noted above, the shares in Luster Wealth were sold by Ringo Chan at an effective price of $0.37 per Finsoft share, so that is probably what Convoy paid for them, and the gain is $1.00 per share, or $131.8m, which is close to the $125.9m portfolio net gain reported by Convoy.

The word “Finsoft” does not appear anywhere in Convoy’s interim report, and they do not even admit that almost all the group profit came from a single unrealised gain in one massively inflated stock. But what you will find is the following hogwash on page 12:

“The Group recorded realised and unrealised fair value gain on equity investments and dividend income of approximately HK$126.8 million for the period ended 30 June 2014. The significant increase in revenue from proprietary investment business was mainly due to good performance of our investment portfolio, reflecting our strong and experienced investment team and effective investment diversification strategies, which help investing in a diversified portfolio of listed equities. This can help mitigating equity price risk and generating income under volatile market condition.”

The SFC should investigate Convoy and its directors for making this false and misleading statement. By our reckoning, the Finsoft stake accounted for 73% of the “diversified portfolio” at the period end. That is not diversified at all. We pause to state the obvious irony here: Convoy group is one of HK’s largest peddlers of “independent financial advice” to individuals. You know, helping them to balance their financial risks, that sort of thing.

With no subsequent filings, we assume Convoy still owns between 5% and 5.99% of Finsoft, so let’s take the lower figure of 5% (100m shares) and today’s closing price of $2.47. That gives them a 6-month paper gain of $1.10 per share, or $110m in total, and values the shares at at least $247m. We wonder whether the auditors will agree with that figure as being “fair value”.

On 30-Apr-2013, Mr Kwok, the pre-IPO “strategic investor” in Finsoft, was appointed as an ED of Convoy. On 23-Apr-2014, Mr Kwok stepped down from ED to NED of Convoy, and on 2-Jul-2014, he resigned as director.

“Shareholder B” is CNEF

Now, what happened to former Finsoft CTO Mr Lai’s shares of Luster Wealth? Remember, he held 65 shares (6.5%) at the IPO, but by 17-Jun-2014, “Shareholder B” held 66 shares (6.6%), which may include 1 share acquired from Ringo Chan a month earlier. The remaining shares of Luster Wealth are still held by the original shareholders.

Shareholder B is almost certainly CNEF, because according to its interim report at 30-Jun-2014, it held 91.575m shares (4.58%) of Finsoft, acquired at a cost of $33.883m ($0.37 per share), which matches the price at which Ringo Chan sold his shares in Luster Wealth. CNEF probably bought Mr Lai’s shares. CNEF appears to have deposited the shares into CCASS on 3-Jul-2014 via HSBC, a major custodian.

As a result of the inflation of the Finsoft price, at 30-Jun-2014, CNEF’s holding was valued at HK$124.542m (at $1.36) and it booked an unrealised gain of $90.66m. without which, CNEF would have made a loss for the half-year. While acknowledging Finsoft (which is more than Convoy did), CNEF claimed:

“the Company deployed a timely and appropriate investment approach in response to the ever-changing market sentiment and government policy so that net assets under its management recorded a substantial increase”.

Ah yes, such wisdom, such skill, such crap! Finsoft accounted for 38.4% of CNEF’s NAV at 30-Jun-2014. Tony Tai Man Hin, the CFO and Company Secretary of CNEF, is an INED of Finsoft since its IPO.

Mr Kwok cashes out

Meanwhile Mr Kwok appears to have deposited his 112.5m Finsoft shares into CCASS via Gransing Securities Co Ltd on 11-Jun-2014. 2 days later, he sold them in an off-market transaction at $0.365, cashing in $41.06m for his original $2.4m investment. The shares moved to custody of Fordjoy Securities and Futures Ltd on 17-Jun-2014.


In 2013, Finsoft set up what it called a “referral business” segment, to “source, identify and refer prospective deal opportunities to interested parties”. On 3-Oct-2013, in incorporated Limited in HK, although it doesn’t even own the domain in its name – it owns a similar HK domain, This segment booked HK$2.2m of revenue in 2013 (all in the 4th quarter) and a $0.978m profit. Finsoft also set up a licensed money-lender, Finsoft Finance Ltd, which began making loans in the first half of 2014, with $2.2m outstanding at 30-Jun-2014.

In the first 9 months of 2014, Finsoft booked revenue from “referral services” of $6.91m. Now look at the Dealmatch site (captured here). It lists 3 “New Projects” which are apparently deals it has clinched in 2014, presumably generating referral fees. The largest deal by far is “Dr Vio & Partners” at $400m, and the second-largest is “Megafit” at a purported $45m. Well we can link both of these indirectly to Convoy.

For Dr Vio & Partners, Town Health International Medical Group Ltd (Town Health, 3886) is the buyer of 94.3% for HK$409.3m asannounced on 12-Jun-2014. At that time, Town Health owned 25.07% of Convoy. A circular went out on 21-Aug-2014 and the deal wasapproved by shareholders on 25-Sep-2014.

For “Megafit”, on 16-Aug-2014, China Renji Medical Group Ltd (CRM, 0648) signed an MoU to buy a 55% stake in Mega Fitness (Shanghai) Investments Ltd, which operates a chain of sports and fitness outlets in the PRC under the “Megafit” brand. The MoU was followed by a formal acquisition agreement on 27-Aug-2014, with a price tag of HK$35m (not $45m as displayed on the Dealmatch site). The deal has still not completed – a circular has been repeatedly delayed and is due out today.

On 9-Oct-2014, CRM launched a placing of convertible bonds via Win Fung Securities Ltd in two equal tranches of HK$43.34m, of which the first tranche was done under the general mandate without the need for shareholders’ approval. Each tranche is convertible into shares equivalent to 12.12% of the existing shares. Tranche 1 was completed on 31-Oct-2014, and the sole subscriber was “Hyrdra Capital SPC for and on behalf of SP#2”. A disclosure of interest shows that Convoy, via a 70% subsidiary, DRL Capital Investment Management Ltd, has a deemed interest in this investment.

It may not surprise you to learn that Town Health was a shareholder of CNEF, building up to 28.15% by 1-Mar-2013. It held that position until 15-May-2014, then sold down below 5% over the next 5 days. Also at 30-Jun-2014, CNEF held 16.816% of Hyrdra Capital SPC at a book cost of HK$37.5m.

About Convoy

Convoy was listed on 13-Jul-2010 after an IPO of 100m shares (25%) at HK$1.20, raising $103.0m net, after having paid out dividends of HK$72.0m in 2009. Initially they listed only part of the group, Convoy Financial Services Ltd, which peddles Investment-Linked Assurance Schemes (ILAS) and Mandatory Provident Fund (MPF) products. A separate company, Convoy Asset Management Ltd (CAM), sells investment funds.

On 16-Feb-2011, Convoy announced a placement of 3 series of unlisted 1-year warrants to subscribe new shares, 30m at $1.60, 15m at $1.80 and 5m at $2.00, totaling 50m shares at an average of $1.70, compared with the closing price of $1.59. The price per warrant was just $0.02, so the whole exercise raised on $1.0m gross, and it doesn’t take a binomial pricing model to tell you that this was far below the fair value of the warrants. Convoy’s stock price headed downwards though, and the warrants all expired unexercised on 23-Feb-2012.

Never mind, try again. On 25-Feb-2013, Convoy announced a placement of 80m unlisted 5-year warrants in 2 equal tranches, exercisable starting from 1-Jan-2015 and 1-Jan-2016 respectively. The placement price was just $0.01 per warrant, with an exercise price of $1.41, the closing price that day, so it raised just $0.6m gross. Again, this makes no sense; a 5-year at-the-money call option is worth vastly more than 1 cent.

On 26-Mar-2013, Convoy agreed to issue 19m new shares at $2.30 to Town Health. Because the warrant issue had already blown the 20% general mandate, the shares were issued under a specific mandate at an EGM and the subscription completed on 23-May-2013.

On 24-Jul-2013, Convoy launched a placing via Astrum Capital Management Ltd (Astrum) to issue 44m shares at $1.85, raising $78m for the purposes of money lending and proprietary investment. The placing completed on 12-Aug-2013. The next day Convoy lent HK$33m at 12% p.a. for 5 months to a subsidiary of an unnamed main board company, and by 30-Jun-2014 it had $146m of loans receivable, or about 27% of its net tangible assets.

On 30-Sep-2013, Convoy agreed to buy CAM from its parent Convoy Financial Group Ltd (CFG) for HK$30m and to buy Kerberos (Nominee) Ltd from Convoy Inc. (a substantial shareholder of CFG) for $0.101m, both satisfied with new Convoy shares issued at $1.87 each. According to Webb-site Who’s Who, CAM had 1162 SFC-licensed persons as at 30-Dec-2014, more than any other SFC-licensed firm. These are mostly self-employed “consultants”, not employees, and they may do other things. An acquisition circular went out on 22-Nov-2013 and the deal was eventually completed on 3-Mar-2014.

Meanwhile on 2-Dec-2013, CFG sold 148m Convoy shares at $1.50, slashing its holding from 59.16% to 27.20%. The placing agent was RHB OSK Securities Hong Kong Ltd, and Town Health took 46.934m shares, increasing its holding from 4.54% to 14.67%, while RHB Asset Management Sdn Bhd took 36.116m shares (7.80%).

On 8-May-2014, Convoy launched a placing of 39.8m shares at $1.15 via Kingston Securities Ltd for “general working capital and for business development” which completed on 27-May-2014.

On 5-Jun-2014, Town Health bought 46.116m Convoy shares (8.89%) on market at $1.55, increasing its stake from 16.19% to 25.07%.

On 30-Sep-2014, Convoy launched another placing via Astrum, issuing 95.82m shares at $1.00 to raise $92.2m net. That completed on 15-Oct-2014. The following month, on 26-Nov-2014, Convoy lent US$12.26m (HK$95.0m) to an unnamed “limited partnership in the Cayman Islands” for 2 years at 10.75% p.a., secured by a share mortgage in respect of “certain shares of a company incorporated in the Cayman Islands”. They didn’t say whether it is listed. This replaced an earlier US$3.59m loan made by Convoy to the same borrower on 3-Jun-2014.

On 9-Dec-2014, Convoy lent HK$55m to an individual (human) borrower for 6 months at 15% p.a., secured against “certain shares” of a company listed on the HK main board. They didn’t say which company, or what the loan-to-value ratio is.

On 21-Nov-2014, CFG disposed of its remaining 138,964,104 shares (22.61%) of Convoy for cash off-market at $0.78, the previous day’s closing price. 2 of the EDs acquired disclosable (over 5%) holdings on the same day at the same price. Mark Mak Kwong Yiu, who has been promoted to CEO of Convoy effective 1-Jan-2015, acquired 5.26% and Chairman Wong Lee Man acquired 5.54%. They probably withdrewthose shares from CCASS on 16-Dec-2014.


On 13-Jun-2014, Ronnie Hui Ka Wah (Dr Hui) was appointed as ED of Convoy. He was an ED of Town Health from 7-Nov-2007 to 30-May-2011. He then became CEO of Hanergy Thin Film Power Group Ltd (Hanergy, 0566) from 3-Aug-2011 until 4-Mar-2013 when he became its Finance Director, resigning on 15-May-2014. After leaving Hanergy, Dr Hui rejoined Town Health as co-CEO on 3-Jun-2014 rising to CEO on 22-Jul-2014.

Hanergy in our view is a huge HK$117bn (US$15.1bn) bubble at today’s record high closing price of $2.81, but we’ll save the full story for another day.

Oh alright, we can’t resist. We’ll summarise by saying that Hanergy’s enormous profit margins depend on the goodwill of its only customer which is also its parent group and which takes a long time to pay for its products. Hanergy makes equipment and turnkey production lines for the manufacture of solar photovoltaic modules. In 2013 it booked a gross profit of HK$2666m on sales of $3274m, or 81.4%, and a net profit of $2069m.

Hanergy accounts for revenue and profits on a “percentage of completion basis”, which is earlier than actual invoicing. At 30-Jun-2014, Hanergy had net tangible assets of HK$8,023m, of which $4157m was gross amounts due from contracts with Hanergy Affiliates (revenue which had not been billed) and $1914m was receivables from Hanergy Affiliates. It had also made prepayments to Hanergy Affiliates of $1540m for photovoltaic modules for solar power plants (Hanergy is going downstream), most of which had not been delivered. Add that all up and you see that $7611m, or 95% of the net tangible assets, are accounts with Hanergy’s parent group. So not only is Hanergy in a bubble at 15 times its NTAV, but most of the NTAV depends on its parent group not defaulting. The listed company pays its parent in advance, but gets paid in arrears, heavily supporting its parent.

Solar energy may be part of a sustainable future, but Hanergy’s stock price won’t be.

©, 2014


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