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Chip Eng Seng fends off concerns over rights issue

First-ever exercise draws many questions from shareholders but independent director, CEO defend decision

Chairman Celine Tang and her husband Gordon Tang abstained from the vote. Together, they control about 29.73 per cent of Chip Eng Seng, or 186 million shares, after buying out founder Lim Tiam Seng at S$1.08 per share in October last year.


SHAREHOLDERS who attended Chip Eng Seng's extraordinary general meeting (EGM) on Friday generally struggled to feel good about the board's proposed rights issue.

But the property and construction group will proceed with the renounceable underwritten rights issue as planned, after 78 per cent of votes cast favoured the deal.

Only about 110 million shares took part in the vote. Chip Eng Seng has an issued share capital of 626 million shares.

Chairman Celine Tang and her husband Gordon Tang abstained from the vote. Together, they control about 29.73 per cent of Chip Eng Seng, or 186 million shares, after buying out founder Lim Tiam Seng at S$1.08 per share in October last year.

The shares traded at S$0.63 on Friday as more than 100 people gathered for the meeting at Orchid Country Club. Chip Eng Seng wants to raise a full S$96.3 million in net proceeds for its expansion plans.

Some were vexed that the rights shares, at S$0.63 apiece, were not priced to attract full subscription, whereas the Tangs stand to receive a sub-underwriting fee of S$1 million or 1.5 per cent of the gross proceeds from the underwritten rights shares.

This structure also allows the Tangs to raise their stake in Chip Eng Seng beyond 30 per cent without triggering a mandatory general offer.

The Tangs are practically underwriting the entire rights issue in a "backwards" manner, one shareholder told the board. "If you had known that they (UOB, the underwriter) would do sub-underwriting with the Tangs, why didn't you ask the Tang family to underwrite the whole issue? Then you don't need to pay the underwriters."

Independent director and former Chip Eng Seng company secretary Abdul Jabbar replied: "For us to enter into such an arrangement with the family is an IPT (interested person transaction). Then, instead of a whitewash resolution, we would be passing different kinds of resolutions so that would complicate matters."

Mr Jabbar added that UOB was chosen because it offered the lowest underwriting fee of all the banks that Chip Eng Seng approached. "After that, it's UOB's own internal processes, they went to approach the family for sub-underwriting, we can't stop them."

It is common practice for banks to engage sub-underwriters to pare their risk, especially when rights are issued close to the market price. Such agreements aren't usually disclosed if the sub-underwriter is not an independent third party.

Other shareholders asked why Chip Eng Seng was departing from the market norm to price its rights shares at a 5.97 per cent discount to the theoretical ex-rights price.

The mean discount for comparable transactions in Singapore is 24.77 per cent, according to independent financial adviser SAC Capital. The median discount is 24.98 per cent.

Chip Eng Seng chief executive Raymond Chia laid some of the blame on market forces. "When we were planning for this (rights issue), our share price was about 72-73 cents. Of course there was a debate about whether we should do it at a steep discount or minimum. So we came up with 63 cents, which was a 12-13 per cent discount from the price then. It took some time for SGX to reply, and upon SGX approval, we did an announcement immediately."

Mr Jabbar said: "Why the small discount? We know there are other things going for the company... We look not just short term, 'Oh, everyone's giving a big discount, we also must do big discount.' We look at many other things, we look five, 10 years down the road."

One proxyholder pointed out that Chip Eng Seng is seeking new funds shortly after investing S$30 million in a distressed real estate development project in Jiangsu in June. He asked: "Are we stepping out of our circle of competence by going to China?"

The project is a 51:29 joint venture between Chip Eng Seng and Haiyi Investment, an associate of the Tangs.

Mr Chia said: "There are risks and we will manage the risks."

The real estate business in China now is very, very difficult, he said, but playing "white knight" allows Chip Eng Seng to go to China to do real estate in a very quick way.

"Actually, this is a project brought by our own staff. Subsequently, we approached Mr Gordon Tang because of his presence in China," Mr Chia said, and Mr Tang said that if there is a need, he would get his own people to monitor the project, and bear the staff cost for Chip Eng Seng.

Another shareholder observed that many investors had been selling their shares in Chip Eng Seng due to a lack of confidence after the Tangs emerged as the largest shareholders.

Mr Jabbar said: "In my own view, the current management is very, very independent of the majority shareholder. My main assurance is that when Celine is on the board of directors, she is there like any other independent director. There is no vested interest. She is a pure financial investor. We can organise a durian party for us to sit down together with Celine to talk a bit more about her aspirations for the company."

When asked to weigh in, Ms Tang spoke in Mandarin. She said she had heard the arguments for why the rights issue was unattractive. But she has chosen to support the exercise for the same reasons she chose to invest in Chip Eng Seng last year, she said. She had also supported the company when it raised debt in March, taking up S$30 million of its notes issuance.

The board fielded questions for more than two hours before voting took place. Independent director Lui Tuck Yew was not present.

The EGM was closely watched because corporate governance advocates Mak Yuen Teen and Chew Yi Hong had opined, in a column in The Business Times on Wednesday, that shareholders should vote against all resolutions at the EGM, to send a message to the Tangs that a general offer should have been made as they strengthened control over Chip Eng Seng.

On how Chip Eng Seng's first-ever rights issue would affect its dividend policy, Mr Chia noted that the company has paid a dividend of S$0.04 per share for nine consecutive years. "Barring any unforeseen circumstances, I don't foresee any change in the dividend."

Chip Eng Seng's net gearing was 1.8 times as at June 30. The rights issue would reduce that to 1.52.