Hao Wen, Capital VC and Unity
24th September 2015
Browsing through documents for a much longer forthcoming story, we came across two highly questionable acquisitions that link together 3 listed companies: Hao Wen Holdings Ltd (Hao Wen, 8019) and two Chapter 21 investment companies, Capital VC Ltd (Capital VC, 2324) and Unity Investments Holdings Ltd (Unity, 0913) that we have warned investors about in the past.On 1-Sep-2014, Hao Wen Holdings Ltd (Hao Wen, 8019) announced the acquisition of 22.5% of Sincere Smart International Ltd (Sincere Smart, BVI), which owns 100% of Ideal Surplus Inc Ltd, a HK company which, according to Hao Wen, is “principally engaged in the provision of cloud platforms application and solutions”. The “About us” page of its web site seems to confirm this, but if you click on the English “Home” button then you get a whole different experience – some sort of online Chinese betting platform. The vendor was a Mr Wang Zewei (Wang Zewei) and the deal completed on 8-Oct-2014.
The cash purchase price of HK$69m for 22.5% implies a valuation for 100% of HK$306.7m, compared with net profit from 7-Jan-2013 to 31-Mar-2014 of $3.4m and net assets of $2.9m, so this was a rich valuation indeed. Hao Wen was “principally engaged in the sale of biodegradable products and raw materials and the manufacture and sale of biomass fuel”. You can see the synergy, can’t you? No?
There was no mention of who owned the other 77.5% of Sincere Smart, so we dug, and found that in the 6 months to 31-Dec-2014, Capital VC bought an unspecified stake in Sincere Smart for HK$42.7m, see note 13 of the interim results. The open offer circular of Capital VC dated 24-Jun-2015, p53, discloses that the stake is 14.00%. So like Hao Wen, Capital VC had paid a price which implies a $305m valuation on Sincere Smart. The next page shows that in the 9 months to 31-Dec-2014, Sincere Smart lost HK$0.2m and ended with net assets of HK$2.7m. This is not what you would call a growth company.
But there was a third player. Note 12 of the 2014 annual report of Unity shows that it spent HK$90m on 29.5% of Sincere Smart, again a valuation of HK$305.1m. So the 3 companies, Hao Wen, Capital VC and Unity had altogether spent HK$201.7m on a 66% stake. However, on 5-Feb-2015, Unity agreed to sell its stake to “a third party” for HK$92m, of which $2m had been paid (see note 33) and $90m was due by 2-Oct-2015. That’s rather convenient, because it avoids having to do an impairment test on the investment for the 2014 audit.
Capital VC has deferred its year end from 30-Jun-2015 to 30-Sep-2015, so it won’t have to deal with that problem just yet.
The connection between Hao Wen and Unity goes further though.
Another investment made by Unity in 2014 was a 29.9% stake in Peak Zone Group Ltd (Peak Zone, BVI) for HK$90m, valuing the whole at $301m. Peak Zone is “engaged in the provision of integrated application.” Note 17(iii) of the Unity 2014 annual report says Peak Zone made a profit of HK$0.392m and had net assets of HK3.092m, so this appears to be another vastly overpriced investment. Again, it was convenient that on 27-Feb-2015, after the year end and before the accounts were audited, Unity agreed to sell its stake to “a third party” for HK$108m, of which just $2m had been received and the rest was due by 31-Dec-2015. That raises the valuation of Peak Zone even further, to HK$361.2m. As Peak Zone was under contract for sale, no impairment test was applied.
By amazing coincidence, the 2014 annual results of Hao Wen include a footnote that on 6-Feb-2015, after the year end, it agreed to buy 5.4% of Peak Zone from an “independent third party” for HK$19.2m (implying a valuation of $355.6m), and the transaction was completed on 16-Feb-2015.
Webb-site Reports urges the SFC’s corporate misconduct team to investigate these transactions.