Shareholders lose 99% as Hong Kong rights offerings go wrong

[HONG KONG] No one can fault the managers of Eminence Enterprise Ltd for lacking chutzpah.

After saddling investors with a 99.99 per cent loss over the past five years, the Hong Kong-listed property firm is asking shareholders to plow fresh capital into the business for the eighth time in five years. Eminence plans to raise at least HK$478.2 million (S$87.8 million) in a rights offering next month, twice as much as its current market value.

It's a scenario that often ends badly for Hong Kong investors, who stumped up more than $16 billion for rights offerings by the city's smaller companies over the past five years, only to watch the median stock drop 36 per cent in a rising market. Now, as China gives its citizens greater access to Hong Kong small-caps through a new cross-border exchange link, the city's repeat rights issuers are coming under increased scrutiny.

Chinese authorities have warned investors to be wary of such companies, even as offerings like the one proposed by Eminence remain legal in the former British colony. Beijing's concerns highlight the potential for friction as the exchange link blurs the lines between a high-touch regulatory regime in China and the more laissez faire system in Hong Kong.

"Individual investors from the mainland get burned when they blindly apply their small-cap knowledge to Hong Kong stocks," said Dai Ming, a money manager at Hengsheng Asset Management Co. in Shanghai. "The mainland regulator sees small investors as the market foundation and offers them meticulous parenting. As Hong Kong seeks to boost trading by luring mainland investors, it must step up protection." Rights issues, in which a company offers new shares to existing stockholders, are used by firms around the world to raise capital for any number of reasons, including paying off debt and funding expansion. While Hong Kong requires companies to disclose details of planned and completed offerings, critics of the city's regulations say unsophisticated investors are vulnerable to firms who use repeated issuance to keep loss-making businesses afloat.

Eminence's proposed rights offering is subject to approval from independent shareholders, according to an exchange filing last month. The company, which also has a money-lending business, plans to use the funds for property investments and working capital, saying most of its HK$376 million of cash and cash equivalents at the end of October has been earmarked for other purposes.

The firm has no comment, according to Betty So, who identified herself as assistant company secretary for Easyknit Group, to whom calls to Eminence were transferred. The two businesses have offices and some top managers in common, and Easyknit, also a property firm, is listed as a substantial shareholder of Eminence in the latter's latest annual report.

Eminence recorded net losses in seven of the past 10 years, including a loss of HK$69.3 million in the fiscal year ended March that the company attributed to declines in the fair value of investment properties in Hong Kong, exchange filings and data compiled by Bloomberg show. Shares have tumbled more than 80 percent in each of the past four years, a period when the Hang Seng Index rose 19 percent.

BLOOMBERG