Risky stocks off chastened Chaoda's agenda

PUBLISHED : Thursday, 03 August, 2006, 12:00am
UPDATED : Thursday, 03 August, 2006, 12:00am

Chaoda Modern Agriculture, the mainland's largest vegetable grower, said it would avoid investments in areas unrelated to its core business after its controversial purchase of a stake in a small Hong Kong-listed firm triggered a sharp fall in its share price.

The pledge, if adhered to, marks a rare instance in which the government's goal of improving the corporate governance of mainland companies by exposing them to the scrutiny of international investors appears to have paid off.

Shares of Chaoda have slumped 8 per cent since its purchase last month of 8.64 per cent of Innomaxx Biotechnology Group for HK$120 million.

Institutional investors complained that the company was misusing funds raised from the sale of HK$1.34 billion of convertible bonds in April.

The company set aside 80 per cent of the net proceeds from the sale to expand its agricultural operations.

'We'll never make this kind of corporate investment again,' Chaoda chairman Kwok Ho said after a shareholder meeting yesterday. The Innomaxx deal was 'merely a capital management measure to enhance the yield on idle funds in the short term', he said, adding that 'management thought it was safe'.

Mr Kwok said the company would focus on its agricultural business, expanding its farmland holdings by 25 per cent to 30 per cent in each of the next three years.

Chief financial officer Andy Chan said the firm would spend HK$6 billion to boost its farmland to 520,000 mu in 2009 from 250,000 mu at present. One mu equals 0.0667 hectare.

Mr Kwok insisted that the Innomaxx deal would be a winner for Chaoda. Innomaxx, which once processed and stored cord blood, suddenly switched its business to mining the titanium ore rutile.

'We recorded an HK$80 million paper gain from the investment in one month,' Mr Kwok said. 'We'll sell the stock at a good price.'

Shares of Innomaxx soared 63 per cent to 68 cents on July 11 when trading resumed after Chaoda's purchase of 300 million shares at 40 HK cents each was unveiled.

The company last week sought to allay investors' concerns.

'Chaoda held a teleconference with investors ... to explain its rationale on the Innomaxx investment from which we [did] not find much substance in relieving our concern on its apparent weakness in corporate governance,' JP Morgan analysts Molly Chen and Vineet Sharma wrote in a report.

'With the existing business itself consuming a lot of cash, we think these unrelated investments will further affect [its] ability to raise the dividend payout ... we see risk of further fund-raising activities.'

Daiwa Securities analyst Tang Chuan said investors would prefer Chaoda focused on its agriculture business rather than investing in illiquid and risky stocks.