Rusal

UC Rusal plans to raise up to US$2.6 billion through an IPO in Hong Kong later this month. Rusal would thereby become the first Russian company to list in Hong Kong, a coup of sorts for the controlling figure, Oleg Deripaska.

The HK regulator, the SFC, was rendered unhappy last month by this news, and it took under consideration two possible measures:

1. Permitting only an institutional placing, i.e. no public offer tranche, and
2. Requiring that minimum transaction size for automated trading be set at a very high level to deter smaller retail investor involvement.

It opted for the latter. Rusal can only sell the IPO to investors who subscribe for at least HK$1m worth of shares. Following the listing, shares will be traded in board lots of at least 200,000 shares each.

If we entertain for a moment the theory that retail investors need to be protected, then wouldn't they have to be "protected" from the secondary market, too? Anyone who can make a bad decision to buy in an IPO context could also make a bad decision to buy the next day! With a minimum lot size defined by share rather than dollar amount, it isn't at all clear how that will shake out.

My own view of course is that investors have to be allowed to make their own decisions, and [even!] retail investors are generally better at knowing what to do with their own money than regulators are at knowing how to 'protect' them.

Indeed, from more than one perspective, the proposed limits would make things trickier for retail investors , not safer at all.

I'm told the prospectus makes a fascinating document, though I have myself yet to dig into its 1,141 pages. If any of my readers wants to study that material, here it is. Go wild.

Asian Citrus

It appears that Hong Kong securities authority, the SFC, should amend its listing rules.

Why? An orange-plantation firm called "Asian Citrus": that's why. Asian Citrus has traded on the Alternative Investment Market of the London Stock Exchange since August 2005. The group's first orange plantation (which was acquired from a precursor entity) is 30.9 sq. kilometers in Hep County, Guangxi province. The second, which the group established, is 37.1 sq kil in Xinfeng county, Ganzhou, Jiangxi province. A third is under development, in Dao country, Human province.

But the recent excitement has nothing to do with the LSE and little to do with the actual business of growing and selling oranges. No ... Asian Citrus was listed on the Hong Kong Exchange last week, and promptly more than 85% of its initial value.

This happened because even before its listing, AC had split its shares 10-for-1. But in the summary section of its listing document, not only did it neglect to mention this fact, but it based its earnings-per-share figure on the number of shares outstanding before the stock split. So the ersatz earnings-per-share figure was ten times the one that an accurate document would have shown. The same shenanigans apply to the company's disclosure of its net tangible asset value.

Richard Li rebuked

On the "Asian values" front ....

Richard Li was rebuked by a court in Hong Kong last month, in a decision only made public this weekm for jiggering the voting rules in his favor at PCCW, the telecomm company once known as Pacific Century Cyberworks.

Li isn't satisfied with being the largest stockholder at PCCW. He wants, in conjunction with China Unicom, to buy out the others and take it private. He pushed the deal through a shareholder meetingm but then Hong Kong's Securities and Futures Commission stepped in, alleging unfair treatment of the minority shareholders.

It is intriguing that Li's partner in this, and PCCW's second-largest shareholder, is China Unicom. It implies that the HK regulators were standing up both to Li (the scion of a powerful family -- according to Forbes, Li's father is the world's 16th wealthiest man) and to Beijing -- a gutsy move. The lower court upheld Li's tactics as legal, but the SFC appeals.

At any rate, the Court of Appeals ruled on the case last month, and its decision is a pat on the back for the SFC, a sharp rebuke for Li. (Li has an option of appealing further, and is said to be considering it.)

You can read more about the case here.

And you can read about an earlier episode in the history of Richard Li and Pacific Century Cyberworks in my other blog.

Asian markets not impressed

One theme of the news coverage this last weekend of the frenetic negotiations in Washington over the details of a Wall Street bail-out plan was this: they had to get a deal n place before the Asian markets opened, Monday morning in Hong Kong and Tokyo, or Sunday evening in Washington. It was crucial to send a message to the investors in those markets.

Upon waking this morning, we can check -- those investors weren't impressed.

The bottom line of today's HK trading, as measured by the Hang Seng index, is a drop of 669.13 points to 18,012.96. In Tokyo, the Nikkei closed 149.55 down at 11,743.61. In Singapore shares fell 32.45 to 2,379.01.

If there had been no deal, the administration and do-something-quick allies would have cited these numbers as proof of how disastrous waiting is.

But there is a deal, so these numbers will of course be spun as proof that the markets need immediate follow-through.

Follow the sun. What's the story with the Euro markets? In Germany, the DAX is down. In France, the CAC-40 is down. In London, the FTSE is down. Gee, this deal doesn't seemed to have worked any market magic after all, has it?

I'm not saying nuttin'....

Hong Kong rivalry, cont.

A HK English language newspaper, The Standard, reported in February that Walter Kwok had been making many business decisions of late under the influence of his mistress of four years, Ida Tong Kam-hing.

This (either the newspaper story or the reality behind it) may have been the catalyst of the decision of other family members -- Walter's two brothers and the family matriarch -- to oust WK from his role as chief executive at Sun Hung Kai, as I chronicled in an entry here last week.

By the way, The Standard itself has some amusing history. It was once known as The Tiger Standard, the creation of Aw Boon Haw, a fittingly Asian mutation of the William Randolph Hearst publishing/tycoon type.

Aw's signature product was Tiger Balm, a cure-all muscle rub that may be a placebo but is a marvellously successful one. Preservationists might want some re-assurance: no tiger parts are employed in the creation of the product.

But back to the Kwok family, its construction/realty business, and Friday's hearing. Walter sought but was refused an injunction against a board meeting. So it now appears that his brothers and mother will be able to oust him from any operational role in Sun Hung Kai.

This doesn't mean that Walter will go quietly. He's suing for defamation.

Hmmm. The business seemed to be doing pretty well before this public tumult began. Maybe they all need to calm down and find a way to go back to work. Could there be a simple balm for soothed egos?

Sibling Rivalry in Hong Kong

Sun Hung Kai Properties, a major property developer in the special administrative region of Hong Kong, has become the prize in a nasty family quarrel.

SHK is chiefly owned by three billionaire brothers: Raymond, Thomas, and Walter Kwok. Walter brought a lawsuit against his brothers last week, and persuaded a judge to enjoin a board meeting. Why? He claims that Raymond and Thomas had him diagnosed as mentally ill (specifically, as bipolar) in order to get him out of the way, silencing his criticism of certain business decisions they want to push through.

Markets don't like turmoil at the tip. The company's stock lost 1% of its value Thursday and 1.7% on Friday.

According to an AP report: Walter "arranged for a Stanford University doctor to visit Hong Kong, fed him misinformation that led him to diagnose Kwok with bipolar affective disorder and called a board meeting for Feb. 18 to discuss Kwok's dismissal."

He fending off dismissal in February by agreeing to a three-month leave. Nearly three months later, on May 8, he called a board meeting inorder to present his own psychiatric evidence. His brothers apparently had that meeting rescheduled for May 18 and, in Walter's view anyway, they were working to undermine whatever presentation he had planned.

Hence the lawsuit and the injunction. No meeting took place on the 18th.

Apparently a court hearing has been scheduled for this Friday.

The Lex column, in today's Financial Times, alludes briefly to this case, as one instance of several of in-fighting among Asiatic business dynasties.

Such fall-out, the columnist thinks, is inevitable "as founding fathers, many in their 70s and 80s, prepare to hand control to the next generation."

Walter is the eldest of the sons of the family patriarch, but primogeniture doesn't seem to give him any extra pull. The patriarch, Kwok Tak Seng, died in 1990. The matriarch is still around.

A post-milkshake hire at Citadel

David Noh, a distressed-debt expert formerly with Merrill Lynch, has a new job at Citadel Investment Group LLC. This piques my interest chiefly because I've read of Mr. Noh in one of Joe McGinniss' "true crime" books.

Citadel announced this hire on Thursday of last week. And though Citadel is a Chicago based operation, Mr. Noh won't be leaving Hong Kong. He'll be the head of Asian Merchant Banking for his new employer.

Congrats to him. Now, on to why I care. At Merrill, Mr. Noh appears to have worked closely with the victim of the infamous milkshake murder Robert Kissel, who in 2003 was bludgeoned to death by his wife, after she had fed him powerful sedatives in a milkshake, thus eliminating the possibility of self-defense.

If I understand Joe McGinniss' book on the case, and if McGinniss has it right, Mr. Kissel was working on a big deal in the days just before his death -- Merrill Lynch was putting together a bid for the distressed-assets portfolio of the Bank of China.

Kissel was murdered on the very day that he was supposed to take part in a crucial conference call about this auction. His wife tried to make it into a missing-person's case, telling people "we had a fight and then he stormed out of our apartment and I haven't seen him since."

The problem with that, though, was that on the afternoon of that day, after drinking the milkshake but before it had taken its full effect, Kissel did speak to his associate David Noh on the telephone. "Noh wanted to straighten out a few details in advance of the seven-thirty conference call" McGinniss tells us.

That call didn't go well. Kissel didn't seem to be making sense, and Noh was concerned that he might be intoxicated. He said, "Listen Rob, I'm going to give you a couple of hours to clear your head." End of conversation. That was also the last time the two ever communicated.

And so it goes. I'll spare you further melodrama, except to stress the point that bugs me. I may be obsessive-compulsive but ... McGinniss never does tell us what happened to the Bank of China deal. Did Noh and the rest of the team at Merrill pull themselves together and proceed without him? Which institution ended up getting the B of C's distressed debts?

Inquiring minds want to know. So if anybody who reads this has an e-mail address for Mr. Noh at Citadel, please send him a link to this blog, and let him know I'm curious. What happened to that portfolio?

Thanks.

[May 29 Postscript. It has since come to my attention that Citi won that auction. I still think McGinnis should have covered this point.]

Importance of stock markets

I received a review copy recently of a new book by Frank B. Cross and Robert A. Prentice, LAW AND CORPORATE FINANCE.

I'm not going to review it here, but I would like to quote one passage from the first chapter that piqued my interest and that relates to the issues I discuss on this blog.

"The value of stock market financing was disputed for some time, when East Asian countries' success was fueled by bank lending and cross-ownership arrangements for investment, without much in the way of freely traded national equity markets. Some even suggested that the developed equity markets of countries such as the United States could be counter-productive, by creating demands for short-term performance at the expense of long-run economic success. Time has not been supportive of these theories, though, and empirical research generally bears out the importance of developed and free equity markets, although the incentive for short-term focus by American companies remains a concern."

He gives no citation for the ideas he's referencing there. As I understand it, though, he's referencing the 1980s and the first half of the 1990s, when the term "the four tigers" [sometimes, confusingly, the four dragons instead] became popular for South Korea, Taiwan, Hong Kong, and Singapore. There are also in a further confusion of the metaphor, "aspiring Tigers" in Malaysia and Indonesia.

It was in 1994 that Foreign Affairs posted an interview of the long-time prime minister of Singapore (then in retirement) Lee Kuan Yew which has been much-quoted in this line.

Eastern societies are different from Western ones, he said, because easterners believe "the individual exists in the context of his family. He is not pristine and separate. The family is part of the extended family, and then friends and the wider society."

Tu Wei-Ming, a philosophy professor at Harvard University, is one of the scholars who has helped promulgate similar arguments about the connection between "Confucian values" and the dynamism of certain societies such as Singapore.

While it's too easy to bloviate in these areas, it may be safe to say there was a dispersion after 1949. The entrepreneurial segment of China's population left ahead of the communist takeover. The sizeable Chinese minorities in several adjacent countries have become relatively prosperous and politically influential there. This in turn has left them open to periodic bouts of race-baiting, but it has proved beneficial in terms of the growth of the host societies.

Two of the dragons, of course, ARE Chinese. Hong Kong and Taiwan. The other two, Singapore and South Korea, have benefitted from this dispersion, as have the aspirants.

The post-1949-dispersion model appeals better to my own intuitive sense of how the world works than does the sort of Kiplingesque East/West dichotomies of former prime minister Lee.

At any rate, it does seem likely that amidst the dispersants and their descendants there would develop interpersonal connections that would be more important than the impersonal market operations one experiences through a stock exchange. When a company borrows money from a bank, one person speaks directly to another, they discuss the terms, they fill out the forms together. In issuing stock to raise money, abstraction of a different order is at work. So we're bank to the passage in the Cross and Prentice book with which we began -- a preference for bank lending over stock market financing might have become a feature of the development of some nations, and might even have been praised as an element in their success.

The crisis of 1997-98 would naturally have put the kibosh on such talk. Can we infer, then, that stock exchanges have become more important in the countries I've named over the last ten-eleven years?

Yes, we can. We can also see as a matter of fact that some of the phenomena that come with public markets for equity, including proxy fights, have become more prominent in east Asia recently. I'll say something about South Korea in particular tomorrow.

HSBC Critic Buys Ad Space

The founder, principal, chief-cook-and-bottle-washer of Knight Vinke Asset Management (KVAM) has renewed his criticism of HSBC. Today's Wall Street Journal contains Eric Knight's indictment of the giant global bank, taking up two thirds of page B6.

HSBC traces its history back to 1865, when a Scot named Thomas Sutherland decided that there was money to be made in providing banking services along China's coast. He set up a bank in Hong Kong in March and another in Shanghai in April -- hence the name, "Hongkong and Shanghai Banking Corporation," which gave rise eventually to the more economical name: HSBC.

Skipping forward a bit ... HSBC shares are traded on four exchanges: Hong Kong, Paris, London and New York. It isn't literally true that trading never stops -- a really persistent trader/specialist might allow himself a bit of sleep after the New York close and before the Hong Kong opening bell. But not much.

Sticking to New York and to US dollar denominations: HSBC's stock was trading in a range between $96 and $98 for much of October. Through November, it has broken decisively out of that range -- downward. The price is now in the mid $80s. This is unsurprising, given the credit turmoil in the US especially. Why shouldn't investors in HSBC simply ride out that turmoil and wait for a rebound? What in particular makes Mr. Knight unhappy with management?

I'll leave that as my cliffhanger. More in tomorrow's entry.