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Protecting Minority Shareholders from Expropriation

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NOV
21
Suspicious REXLot 御泰中彩控股 (555.HK) Right Issuance
Below is an open follow-up letter to the HKEx, HKSFC, independent directors and auditors of Rexlot 御泰 , and the general public, regarding the latest rights issuance announcements by Rexlot Holdings (555) 御泰中彩控股 in Hong Kong.



Dear Sir/Madam,

In response to the recent rights issuance announced by Rexlot (555) on November 19, 2017, we are writing to invite the regulatory bodies to veto the proposed rights issuance by Rexlot (555) due to suspected connected transaction, groundless transaction rationale, misleading disclosures, etc. We also urge the regulatory bodies to condemn the management team and directors of Rexlot for multiple attempts in misleading minority shareholders and for failing to fulfill its duty in protecting shareholder interests.

Suspected Connection Transaction

The proposed right issuance is expected to raise ~410 million HKD. The company claims to utilize it to settle offshore liabilities comprising of three parts. The announcement only provides a number associated the second part, i.e. Shareholder's Loan, which is exactly 411 million HKD and the third part, i.e. other liabilities 13 million. The company does not provide a numerical figure for the first part. Given that the majority of the bond amount (550 million) is due in 2019, and at most 100 million is due in 2017 (as disclosed by the company), it is reasonable to deduce from the announcement that between 75% to 100% of proceeds raised in the rights issuance will go into the hands of its insider, Victor Chan. At the same time, Victor Chan also serves as a major underwriter for the issuance. As a result, we strongly believe that the right issuance should be classified as connected transaction and therefore should require minority shareholder approval during SGM.

Groundless Transaction Rationale

The company claims to use the proceeds to satisfy current offshore liabilities. We believe that the rationale is completely groundless and the situation portrayed in the announcement is distorted. According to the interim report as of June 30 2017, the company has over 5 billion total current asset versus 1 billion total current liabilities. In other words, the company has a current ratio of ~ 5 times, higher than 90% of the public listed companies in Hong Kong. In fact, the 1 billion total current liabilities is overstated in the financial statement. Over 500 million is related to bond that won't mature until 2 years later in 2019. 410 million is owed to Victor Chan but Victor Chan also owes the company 350 million. So only 60 million is net and the real current liabilities is at most 200 million. This is such an insignificant amount to the over 1,700 million cash and bank balance claimed by the company.

In fact, no business in the world attempts to reduce it current liability to zero. The company is in a significant net cash position with a lot of cash sitting on the balance sheet (although not sure if it is real or not) and is likely to suffer from "free cash flow" problem as documented in the academic governance literature. Furthermore, it is so easy to raise capital in the offshore market. The company has zero liquidity problem from all the indicators. Therefore the rationale for the right issuance is unfounded and makes zero business. Based on prior decision by regulators on right issuance this year, we strong believe that the regulators should be consistent in rejecting such groundless right issuance offers that aim to harm the interests of minority shareholders.

Misleading Disclosures

The company has repeatedly made misleading disclosures at the detriment of minority shareholders. For example, on the announcement document, the company has misrepresented the liquidity situation of the company (as described above), including but not limited to omitting the fact that a significant portion of the bond won't mature until 2019 and Victor Chan is owing company $350 million which can easily settle the $410 million shareholder loan (the detail terms of the shareholder loan is also unclear). In short, the rationale for the transaction was just fabricated by the company.

In prior disclosures earlier, e.g. on announcement made on August 31, it was announced that the proposed right issuance would be priced at 10% to 20% discount to the current price back then, which was 0.073. In other words, the minimum offer price would be between 0.058 and 0.059 if a max of 20% discount was considered. Investors trading between then and now were seriously misled by the information. Now the offer price was set at 0.051, a further 15% lower than the worst expectation. The company kept quiet during the period. The company issued on update in late September and promised to give another update in mid October. However, the update was never given in mid October.

These are just tips of the iceberg. Some further examples and evidence were provided in our open letter on September 1 2017, including the company and Victor Chan concealing the real buyer of the disposal transaction and real transaction price that the real buyer offers. We urge the regulators involved to watch this company and its directors closely and condemn them for their past mischievous behaviors.

Expropriating minority shareholders

It is widely believed that the purpose of right issuance is to provide a low-cost channel for company insiders to increase its voting power at shareholder meeting to approve further expropriation activities by company insiders. The right issuance will introduce some friendly shareholders to insiders from two other underwriters. The company is also introducing a friend of the insider to own 5% share. These parties will likely vote for the insider in approving future connected transactions that will tunnel the wealth away from minority shareholders.

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