## Hiding behind the cornerstones  


In our article _The Joint Global implosion_ last week, one of the listed companies that held the doomed investment was Rentian Technology Holdings Ltd (**Rentian** , 0885). The  2015 accounts of Rentian hold other surprises to which we now turn.

Rentian's net tangible assets (**NTA**) at 31-Dec-2015 were HK$1815m. Of this, the group had financial assets totaling $2284m. These included HK-listed shares worth HK$1283m. Although the report doesn't name any of the listed shares involved, we knew from a  disclosure of interest that at 30-Dec-2015, Rentian held 1,115,929,800 shares (now 6.95%) of Carnival Group International Holdings Ltd (**Carnival** , 0996) which ended the year at $1.00 per share, so that is $1115m or 86.9% of the listed shares portfolio, or **61.4%** of NTA. 

This is no coincidence, because both Rentian and Carnival are now controlled by King Pak Fu (**Mr King**), although he is not a director of Rentian. Also at 31-Dec-2015, Carnival owned 155.5m shares (now 1.53%) of Rentian. Carnival is a mainland property developer whose main project still in progress is "Rio Carnival" in Qingdao, Shandong Province, 64% owned by Carnival. In our view, both Rentian and Carnival are in a bubble, as we explain later in this article, but first, we turn to the issue of hidden cornerstone investors in HK IPOs.

### Equity-Linked Notes

Rentian also held "equity-linked notes" (**ELNs**) booked at a valuation of $475.1m. Note 18(b) states that in Nov-2015, Rentian subscribed ELNs issued by "two investment entities incorporated in the Cayman Islands and the Republic of the Seychelles respectively" with a total principal amount of HK$458m, and the issuers also obtained margin loans of HK$439.357m from a "financial institution".

The issuers used the total amount of $897.357m to buy 184m shares of an unnamed HK-listed company, which implies a total purchase price of about $4.877 per share. The ELNs do not pay interest. Rentian pays the issuers an 8% annual "management fee" on the principal on a monthly basis, which presumably helps service the interest on the margin loan. The ELNs are redeemable at Rentian's discretion "from time to time after May 2016 based on the net proceeds to be obtained from the disposal of the Underlying Securities at the time of redemption" after repaying the margin loans and costs. No expiry date was stated.

On 1-May-2016, Webb-site complained to the Stock Exchange about the failure of Rentian to disclose details of its significant investments as required by paragraph 32(4) of  Appendix 16 of the Listing Rules. Eventually on 6-Jun-2016 Rentian coughed up an  announcement which stated that the shares underlying the ELN were in a still-unnamed "Stock B", a constituent of the Hang Seng China - H Financials Index, which was listed in 2015 and:

> "which cannot be identified due to confidentiality obligations".

To us, that is like a red rag to a bull, or rather, a bear. This underlying investment of $897.4m amounted to **49.4%** of Rentian's NTA, and just because it was wrapped up in off-balance-sheet issuers with margin loans doesn't give Rentian the right to contract out of the Listing Rules by agreeing to confidentiality. It is clearly a significant investment.

Regulatory note: once again the Stock Exchange has accepted a listed company's claim to be "in the business" of securities trading even when only two investments account for 110.8% of NTA, and therefore turns a blind eye to transactions which in our view should be treated as Discloseable or Major Transactions under the Listing Rules, requiring announcement and, for Major Transactions, shareholder approvals. In any event, these transactions are so large that the SFC should be investigating non-disclosure of material price-sensitive information when the investments were made.

### The stock under the ELNs

The Stock Exchange did not require Rentian to disclose the identity of the shares underlying the ELNs, or the identity of the issuers. However, Webb-site has figured it out, and it raises significant questions about the for-profit regulator's role in facilitating hidden cornerstone investors in IPOs, which in turn facilitate the IPOs themselves. Note 5 of the announcement stated that "Stock B" is issued by a bank which has stated:

> "that it will proactively gather momentum on traditional businesses of wholesale, retail and asset management as well as on innovative businesses of "Internet +" and "Commercial Bank +"..."

That drivel continues for several lines. Search all HK-listed company announcements for "proactively gather momentum" and it becomes clear that these words can only have come from the 2015  annual results of Bank of Qingdao Co., Ltd (**BOQ** , 3866) which was listed on 3-Dec-2015 following an IPO jointly sponsored by Goldman Sachs (Asia) LLC and  CITIC CLSA Capital Markets Ltd. So "Stock B" must be BOQ H-shares.

In the BOQ  prospectus on page 353-356, you will see that there are 6 cornerstone investors in the offering, each of which agreed that:

> "without the prior written consent of the Bank, the Joint Sponsors and the relevant underwriter(s), it will not, whether directly or indirectly, at any time during the period of six (6) months following the Listing Date, dispose of (as defined in the relevant agreement) any of the H Shares or any interest in any company or entity holding any of the relevant H Shares..."

You will notice that the 6 months from the listing date expired on 3-Jun-2016, which ties in with the "after May 2016" time at which the ELNs can be redeemed. Of the 6 cornerstones, 2 were human and 4 were corporate. Of the corporates, only one, LRC. Belt and Road Investment Ltd (**LRCBR**), was incorporated in the Cayman Islands and only one,  Keystone Group LTD. (**Keystone**), was incorporated in the Seychelles, matching the jurisdictions of Rentian's two ELN issuers.

The  allotment results show that of the total offering of 990m H-shares at the eventual issue price of $4.75, about 678.5m (68.54%) were placed with the cornerstones, including 200m shares to LRCBR and 110m shares to Keystone, a total of 310m shares, or **31.3% of the IPO**.

Paragraphs 2A (q) and (s) of Appendix VII-4 of the prospectus state that AMTD Asset Management Ltd (**AMTD**) was also a party to the cornerstone agreements with both Keystone and LRCBR. Along with the joint sponsors, AMTD was credited as the third "Joint Global Co-ordinator" of the IPO. Now look at the Webb-site Who's Who list of adviserships of AMTD and you will see that of the 9 times it has acted as placing agent since 2014, the 2 latest deals are a  placing for Rentian on 28-Oct-2015 which raised HK$282.44m net and  completed on 10-Nov-2015, and a  placing for Carnival on 13-Jun-2016. This again points to AMTD having arranged LRCBR and Keystone to act as cornerstones, backed by Rentian.

### Carnival's ELNs

Rentian's ELNs only account for 184m BOQ shares - so what about the other 126m shares taken by these 2 cornerstones? Well, take a look at the 2015  annual accounts of Carnival. Note 20 reveals an "equity linked note" valued at HK$330m which was acquired during the second half of the year. We'll take an educated guess that this was also issued by LRCBR and/or Keystone, and accounts for the other 126m BOQ shares held by them. The ratio of Rentian and Carnival's ELN investments at 31-Dec-2015 was $475.123m/$330m = 1.44, close to the share ratio of 184/126 = 1.46. Furthermore, according to their respective interim reports at 30-Jun-2016, in the 6 month period, Carnival's ELN grew 9.4% to $361m, while Rentian's ELN grew 9.5% to $520.117m. It is very likely the same underlying stock.

What this suggests is that Rentian and Carnival stood behind LRCBR and Keystone and in effect bought 31.3% of BOQ's IPO, partly using margin finance. Given that Carnival's main project is in Qingdao, the obvious question is whether Carnival or its controller Mr King does, or expects to do, business with BOQ.

For the Stock Exchange and the SFC, the concern should be that the two cornerstones had apparently transferred their risk in the BOQ shares by issuing the ELNs to Rentian and (probably) Carnival. As long as the saleable value of the stock did not drop below the margin loan, if the description in Rentian's accounts is to be believed, it could redeem the notes for the net sale proceeds.

This back-to-back arrangement allowed Rentian and (probably) Carnival to hide behind the cornerstones. Given that Rentian entered into this arrangement in November 2015, before the 3-Dec-2015 BOQ listing date, it seems reasonable to infer that this arrangement was known at the time of the IPO, at least to AMTD, the joint global coordinator, and to the two cornerstones. It should have been disclosed in the prospectus. The identity of the margin lender, who could potentially end up owning the shares, should also have been disclosed.

The wording of the 6 month lock-up includes "dispose of (as defined in the relevant agreement)" but of course, those agreements were not filed, so we don't know how that is defined. It would have been sensible though to prohibit any such derivatives that would allow evasion of the lock-up, and if that was the case, then the question is whether the Bank, the Joint Sponsors and AMTD consented to this arrangement.

### The regulatory conflict of interest

In processing our complaint to the Stock Exchange about the lack of disclosure in the Rentian accounts, which led to the 6-Jun-2016 "Stock B"  announcement, we don't know whether Rentian told the Stock Exchange what "Stock B" is and who the ELN issuers were, and was then excused from announcing those facts, or whether Rentian refused to tell the Exchange. Knowingly or not, the Stock Exchange now appears to have been an accessory to maintaining the secrecy behind the BOQ cornerstones.

To be clear, we have no objection in principle to cornerstones in IPOs, as long as full disclosure of their interests and who stands behind them is made. A lot of IPOs might not get done without cornerstones, and HKEX (0388), which owns the Stock Exchange, depends on IPOs to expand the stock market from which it generates its monopolistic profit margins. Once again, the need to remove the regulatory function from HKEX is as plain as a pikestaff.

Incidentally, the fact that cornerstones are now so prevalent, reducing the effective free float for at least 6 months after listing, points again to the need to scrap the free float rule.

### About the cornerstones

LRCBR was stated to be a joint venture of LRC. Strategic (Global) Investment Group Ltd (**LRC Global**) and Soulaimane Htite (**Mr Htite**), and LRC Global was claimed to be "a global investment company with expertise in global family office investment and alternative investment products". We've never heard of it before. Mr Htite, or "Soul" as he likes to be called, is a co-founder of US-based Lending Club and founder and CEO of Shanghai-based Dianrong.com, both being P2P lending platforms. He was given 7 lines of glowing biography in the cornerstone description, but note 5 on page 245 states that LRCBR is 99% owned by LRC Global, so Mr Htite can't own more than 1%. Not so much a cornerstone as cornerdust. Perhaps Soul's heart isn't in it.

LRC Global in turn is purportedly owned by Chan Mei Ching (47%), Chan Min Chi (51%), and unknown other(s) (2%). We know nothing about the two Chans, and even the  Chinese prospectus does not contain their Chinese-character names. Simply naming shareholders, without their background, is meaningless disclosure.

Keystone was said to be the overseas investment arm and offshore wealth management platform of Shenzhen Qianhai Keystone Wealth Management Company Limited, which is "one of the leading investment institutions and wealth management companies in the Greater Pearl River Delta and Southeast Asia, focusing on equity investments and fixed income investments in key areas including infrastructure and real estates." However, this implied ownership (if that is what "arm" means) is contradicted by note 8 on page 245 which states that Keystone is owned by an individual, Ouyang Xinxiang. We know nothing about her either.

### Xinte Energy - who's behind their cornerstones?

What we do know is that the same two cornerstones have appeared in another IPO, that of Xinte Energy Co., Ltd. (**Xinte** , 1799) which listed on 30-Dec-2015, four weeks after BOQ. AMTD was again one of 4 joint global coordinators, including joint sponsors UBS Securities Hong Kong Ltd (**UBS**) and  GF Capital (Hong Kong) Ltd (**GF Capital**).

There were 4 cornerstone investors, including LRCBR and Keystone. This time, the  prospectus disclosed that both of them may obtain margin financing from GF Securities (Hong Kong) Brokerage Ltd (**GF Brokerage** , a fellow subsidiary of GF Capital) for up to US$12m each as part of their US$30m each investment. Appendix VI paragraph 2A(f) and (g) shows that AMTD was again party to the 2 cornerstone agreements. The only subtle difference is that the 99% owner of LRCBR is now named "Strategic Global Investment Corporation Limited", dropping the "LRC", but that is still owned 47% by Chan Mei Ching and 51% by Chan Min Chi, about whom nothing is said.

In the  allotment results, the offering of 146.5m shares was priced at $8.80, the bottom of the range. LRCBC and Keystone each took 26,420,400 shares or 18.03% of the offering for US$30m each, a total of **36.06%** of the IPO.

So does anyone stand behind them this time with ELNs, we wonder, and if so, who? Given what happened with BOQ, the regulators should inquire into the Xinte cornerstone arrangements too. Incidentally, since LRCBR and Keystone each ended up with about 9.03% of the  outstanding H-shares, they and their controllers should have filed disclosures of interests, but have failed to do so.

Another thing emerges from studying the Xinte IPO. They had a pre-IPO investor called L.R. Capital China Growth I Company Limited which invested RMB500m in 73,099,415 shares at RMB6.84 (about HK$8.27) per share. Together with two other pre-IPO investors, they have a 1-year post-IPO lock-up. The investor is wholly-owned by L.R. Capital Management Company (Cayman) Limited (**LRC**). The prospectus fails to say who owns LRC or whether it is connected to LRC Global. A web site for LRC lists Raymond Yung as CEO. Until at least Jan-2016, Mr Yung was China Leader of PwC's financial services practice. LRC also lists Mr Htite and former PwC tax partner Marcellus Wong Yui Keung (**Mr Wong**) as senior advisors. Mr Wong is also an INED of Xinte.

LRC  describes AMTD as its "affiliate". AMTD appears to be parented by AMTD Group Co Ltd (**AMTDG** , BVI) which issued a US$110m 3-year bond earlier this year and  listed it in HK (someone please send us the offering memorandum!). The AMTD web site lists Mr Wong as its Vice Chairman, and Calvin Choi Chi Kin is Chairman. He was a representative of UBS until early 2016.

Update 4-Oct-2016: someone has kindly sent us the AMTDG bond offering circular. At 9-Mar-2016, AMTD was 100% owned by AMTDG which was 71.03% owned by L.R. Capital Financial Holdings Ltd (**LRCF**), which was 65.1% owned by LRC, the owner of which was not disclosed. LRC and LRCF acquired control of AMTDG on 13-Oct-2015 from Morgan Stanley Private Equity Asia IV, L.P.. The other 34.9% of LRCF was owned by China Minsheng Investment Corp., Ltd (**CMI**). CMI was a pre-IPO investor in Xinte. We also note from  Webb-site Who's Who that China Minsheng Banking Corp Ltd (**CMB**) is a banker to both Rentian and Carnival. CMB also acted as lead manager to place US$285m of convertible bonds for Carnival in 4 tranches in 2015.

### GF Securities - who's behind their cornerstones?

LRC was also a cornerstone investor in the IPO of GF Securities Co Ltd (**GFS** , 1776), which listed on 10-Apr-2015. That's the parent of GF Capital and GF Brokerage. On that occasion, LRC used another wholly-owned Cayman subsidiary called L.R. Capital Principal Investment Ltd to act as the cornerstone. So again, the question arises, did that issue ELNs too, and if so, to whom?

Update 4-Oct-2016: we missed one more! The  prospectus of China Logistics Property Holdings Ltd (**CLP** , 1589), which listed on 15-Jul-2016, includes 4 cornerstone investors. One of them is LRCBR, for US$20m (and have they issued ELNs this time?), and another is China Fintech Investment Co, a 100% subsidiary of China Fintech Fund Management Co Ltd, which was founded by CMI and GFS. AMTD was the joint global coordinator for these 2 cornerstones.

At the beginning of this article, we mentioned that Carnival and Rentian are bubble stocks. Here's why:

### Carnival bubble

Returning to Carnival, at today's closing price of $0.94, its market value is HK$15,085m. In the  interim report at 30-Jun-2016, it had equity attributable to shareholders of $5550m, but this includes goodwill of $870m and other intangible assets of $212m, so the NTA was only $4468m, or about $0.286 per share. The stock should trade at a substantial discount to NTA, but trades at 3.29x NTA, so the downside is about 75%.

Despite carrying $8059m in borrowings, Carnival found space during the first half of 2016 to put HK$491m into "unlisted investment funds", see note 15 of the accounts.

The goodwill and other intangibles relate to an acquisition of a loss-making restaurant chain operating as "Golden Jaguar" for HK$253.41m in 2015\. 95% of the sale was by "BFT Acquisition Guernsey L.P. Inc." which we believe was owned by funds run by British private equity firm Apax Partners, which  bought it in Jul-2011. The accountants report in the  circular dated 30-Jun-2015 reveals that it had lost money for 3 straight years on declining revenue, and had negative equity of RMB444m. It owed RMB428m to customers, presumably advanced payments for banquets which would only be served if it didn't go bust. At the time of the acquisition agreement on 6-Jun-2015 there were 29 restaurants, but this was down to 20 by 30-Jun-2016.

Including the 6.95% owned by Rentian, Mr King controls 66.24% of Carnival. Other shareholders of the Carnival bubble include China Innovative Finance Group Ltd (**CIFG** , 0412) with 200m shares (now 1.25%) at 31-Mar-2016, and Enerchina Holdings Ltd (**Enerchina** , 0622) which owned 55.65m shares (now 0.35%) at 30-Jun-2016. Hao Tian Development Group Ltd (**HTD** , 0474), a substantial shareholder of CIFG, was also a holder of Carnival at 31-Mar-2016, although it did not disclose how much it held. Rentian, Carnival, CIFG, Enerchina and HTD are all in what we call the Chung Nam Network.

### Rentian bubble

Rentian is what we call a "double bubble" because its shares trade at a multiple of NTA and its NTA comprises mostly shares at a bubble valuation too. Carnival's shares closed on 30-Jun-2016 at $1 per share, the same as 31-Dec-2015, valuing Rentian's stake at $1116m. If we write that down to Carnival's NTA of $0.286 per share (and we are being generous here), then it is $319m. That reduces Rentian's NTA at 30-Jun-2016 from $1676m to $879m, or about $0.0866 per share. It should trade at a discount to that. The stock closed today at $0.56 valuing Rentian at $5.68bn, so the downside is about 85%.

Including 1.53% owned by Carnival, Mr King controls 52.06% of Rentian, and an Executive Director Yang Xiaoyang, via a 90%-owned company, owns 2.07%.

On 31-Mar-2016, Rentian  announced the acquisition of 51% of Next Concept International Investment Ltd (**Next Concept** , BVI) for HK$1101.6m from 3 BVI vendors, in exchange for 1512m shares issued at $0.51 and $330.48m of promissory notes. One of the vendors was owned by Mr Lee Tai Hay, who as a result increased his Rentian shareholding from 3.48% to 8.16%, and has since  cut it to 7.83%. A  disclosure of interest filing shows that another vendor was owned by Zhao Zhen Zhong, who received 5.84% of Rentian, while the third vendor, Asia Shine International Ltd, received 4.38%, below the 5% disclosure threshold, so we don't know who owns that because Rentian did not say.

Next Concept ultimately owns Qingdao Jiashengtai Investment Consulting Co Ltd in the PRC, which is:

"principally engaged in providing one-stop solution, including but not limited to marketing research, software design, IT solution and strategic business consultation and development, to companies in the commodities industry."

That all sounds fancy, but the reality is that Next Concept scored its first turnover in 2015 at just HK$39.63m with a profit of $5.78m and net assets of $5.58m, so for 51% of that Rentian was paying a P/E of 374 and 387x book value. The other 49% of Next Concept is owned by a company called "Future Merit Limited", the owner and domicile of which was not disclosed.

The deal comes with a profit warranty that Next Concept will make $144m in 2016 and $216m in 2017, and any shortfall will be settled first by setting off the promissory notes, and after that in cash, (if the vendors have any). The shares are locked up until the 2016 profit is determined, and 50% will then be released, with the remainder after the 2017 profit is determined.

That takes the known holdings to a total of 72.19%.