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biz.scmp.com
Thursday, October 3, 2002
Private-sector flower wilts
JON OGDEN
Just a few months ago, orchid grower Euro-Asia Agricultural (Holdings) was seen as one of the brightest flowers in China's private-sector economy.
But with its once high-flying stock price diving 86 per cent since May, the company has become an investment community embarrassment.
It has also added to the list of corporate governance nightmares Hong Kong regulators are coming under pressure to weed out.
Take Euro-Asia's insistence on Friday that it was "not aware of any reason" why its stock price had fallen 27 per cent the previous day - when its shares had been released from a suspension ordered by the Securities and Futures Commission (SFC).
The stock then fell 11.63 per cent on Friday to hit a fresh all-time low of 38 HK cents. On Saturday, the company released a statement making the reason for the latest share plunge much clearer.
It said flamboyant chairman Yang Bin had sold down 2.37 per cent of his controlling 54 per cent stake, reaping an estimated HK$16.4 million, according to Bloomberg.
Both filings to the stock exchange were signed by Mr Yang, who last week said he had been chosen by North Korea to head a new free-trade zone in Sinuiju on the border with China.
On Monday, the stock exchange complied with Euro-Asia's request for a fresh suspension "pending release of a clarification announcement".
The descent of Euro-Asia into the cheap tactics of penny stock-dom has come as a huge disappointment to the investment community, which as recently as mid-August was still feting it as a star buy.
Bracketed with other "private chips" or entrepreneurial Chinese companies, Euro-Asia's surging earnings were seen as one way for Hong Kong investors to escape the grinding deflation story dragging on blue chips.
"It was down to the mind-set of investors. Everyone was looking for China plays, [they] just ignored the risks that were there," said Aberdeen Asset Management fund manager Flavia Cheong.
Unlike many peers, Ms Cheong chose to pass up the chance of investing in Euro-Asia with its story of hothouse growth and margins of up to 80 per cent from cultivating orchids and other flowers and vegetables in low-cost China.
In November last year, JF Funds said Euro-Asia was one of its top picks while in January ING Financial Markets put the start-up stock on its recommended list alongside stalwarts such as Cathay Pacific Airways and Television Broadcasts. Brokerage CLSA Emerging Markets also pushed the stock to institutional clients.
But even early this year, cracks were appearing in Euro-Asia's hot story, with the problems seeming to stem from the bizarre array of unlisted businesses headed by Mr Yang, 39, who is listed by Forbes as China's second-richest man with US$900 million in assets.
The former Chinese naval officer, who was educated in the Netherlands and has Dutch citizenship, was forced to deny in January his unlisted interests would become entwined with Euro-Asia.
Mr Yang is spending a cool 2.4 billion yuan (about HK$2.24 billion) to build a Dutch-style housing estate with 50 seven-storey blocks in his gritty northern hometown of Shenyang, Liaoning province. Alongside the estate will be a Dutch theme park with an indoor beach and a 16-hectare indoor tropical garden.
When Mr Yang told investors not to worry in January, he insisted market rumours that he would sell some of his Euro-Asia shares to fund his private projects were untrue. He told Reuters he was not willing to sell any more of his company, pointing to its rosy profits.
All seemed back on course when the company released annual results in April showing profits had soared 173 per cent to 521 million yuan. A dividend of 6.81 HK cents per share was declared.
Paying the dividend proved problematic, though. The company had to take out a HK$118 million bridging loan in Hong Kong to meet its obligation, with the company blaming a delay in transferring money from the mainland to the SAR. Some savvy fund managers wondered if the company was having cash-flow problems.
Rumours about Euro-Asia resurfaced months later, causing it on July 12 to deny to the stock exchange that it was under investigation by mainland authorities over illegal land use, tax evasion and insider dealing.
Just three days later, the company repeated in a stock-exchange filing that it had not been investigated - but in an interview on the same day, Mr Yang told reporters the company had been subject to a routine probe.
Despite the worries, Morgan Stanley analyst Jerry Lou issued a report on July 19 recommending buying, saying "the market's concern over Euro-Asia's corporate governance seems overdone and the stock is deeply undervalued, in our opinion". Mr Lou did not return a call seeking comment.
In August, Mr Yang went back on his word and placed shares to two "strategic" investors. Two obscure businessmen, China and Macau property developer Ngan In Leng and communications consultant Harvey Wee, each bought 9 per cent stakes in the company at HK$1.35 per share, reducing Mr Yang's holdings from 72 per cent to 54 per cent and netting him HK$405 million in the process.
Despite Mr Yang selling out, some analysts were still telling investors to buy in. In mid-August, Deutsche Bank analyst Jim Lam went to Shenyang and met Mr Yang, Euro-Asia's new then chief executive Chen Jun, its bankers and the local land bureau chief.
He concluded: "We believe Yang Bin is financially sound, in view of the recent share placement, we see no reason for another round of share sale."
Mr Lam's recommendation was "buy" with a price target of HK$4.05.
Just more than a month later, Euro-Asia had been suspended at the orders of the SFC over the failure to disclose the resignation of Mr Chen just five months into the job.
Mr Lam downgraded the stock to "hold" just last week.
When asked to explain what had gone wrong with his analysis, he said: "We are stock analysts, we are not gods."
Euro-Asia's story represents a test for regulators.
While the SFC had forced the company to disclose more details about the departure of Mr Chen, a lengthier suspension was needed while trading records were checked for possible undisclosed insider dealing or share-price manipulation, observers feel.
"Surely you suspend the stock and find out who is behind these share-price movements," a fund manager noted.
A specialist China fund manager added: "If that happened in China, the [China Securities Regulatory Commission] has shown it would come down hard. But there's a lot of controversy in Hong Kong about the regulators not coming down hard enough."
With Mr Yang clearly going to be spending much of his time on building the North Korean SAR, let alone his private projects, even supporters such as Mr Lam wonder what the next chapter will be.
"Don't forget that private enterprises are the future of China," said Mr Lam. |
