China.com special dividend payout raises many questions

Cash is king. Nowadays, no one will dispute this. There are billions of losses in accumulator contracts waiting to be settled. There are plenty of assets up for grabs at fire sale prices. The question is how to get cash. For most of us, that is tough. But if you own a listed firm, especially a cash-rich one, you can sell the company something, in fact, anything. Want Want China Holdings has just paid its controlling shareholder Tsai Eng-meng HK$24.2 million for some old office tables, chairs and cabinets that the rice-cracker producer is already using. The reason given is to 'fulfil the need of the group's operation'. Or you can ask for a higher pay. Property developer Chinese Estates Holding recently announced that it would increase the salary of majority shareholder and chairman Joseph Lau Luen-hung from HK$3.6 million to HK$18 million on his request. No reason was given. But this is just peanuts. To get serious money, the distribution of a special dividend is the way to go. A total of HK$4 billion has been handed out since the Lehman Brothers collapse, excluding post-asset sale payouts. The latest to do so is China.com, an internet firm whose non-executive chairman Raymond Chien Kuo-fung fills the same role at MTR Corp. It raised HK$1.2 billion in 2000 which is largely unused. In many ways, a special dividend payout is fairer tool for major shareholders to extract cash, compared to twisted connected transactions. At least shareholders have equal rights. Yet in the case of China.com, that may not be so. Let's wind the clock back to mid-December. The internet firm told the market its board would meet to discuss the payment of dividends, if any. A week later, another announcement proposed to reduce its paid-up capital for each existing share from HK$4 to 10 HK cents. That fuelled hope of a special dividend payout. The reason was simple. Under accounting principles, a reduction of share capital would result in a surplus of HK$427 million being transferred into the company's distributable reserve account. Having a large pool of cash sitting in the bank is not a sufficient condition for paying a dividend. One needs a matchable distributable reserve to do so. In short, the move made it legally possible for China.com to distribute a special dividend. The company said it had no immediate plan to distribute the additional surplus but added that the reduction would 'give more flexibility in distributing its assets to its shareholders'. The company's share price rose from below HK$3.50 to above HK$5. Another announcement on Christmas Eve that the board had resolved not to declare any dividend failed to cool expectations. An about-turn happened on February 4. After suspending its shares for two days, the company announced a profit warning. Recording a meagre profit of HK$500,000 in the third quarter of 2008, it warned of a HK$53 million impairment loss for its investments and therefore a substantial net loss in the following quarter. Any hope of a special dividend had largely evaporated by then. The share price dived to below HK$4.20. Those who sold would regret it the following Monday. On February 9, they realised that the majority shareholder, CDC Corp which is controlled by founder and chief executive Peter Yip, had brought 1 per cent of China.com at HK$4.247 on February 5, the day after the profit warning. If they did suspect any good news was coming, it would be too late to buy. That evening, China.com announced a special dividend of HK$3.66 per share on the ground that it 'has a strong balance sheet and it is appropriate to return some cash to shareholders that have been supportive'. A total of HK$392 million in cash was handed out - HK$309 million to CDC, HK$27.8 million to Mr Yip personally and HK$3.48 million to the management. The post-warning sale purchase brought CDC an additional dividend entitlement of HK$1.32 million, not to mention the 62 per cent paper gain in the share price. The episode raised many questions. Was the board aware of any plan to distribute a special dividend when they made the profit warning? If yes, why didn't it tell investors at the same time? If not, why did the board, which only 47 days ago had ruled against a special dividend payment, revise its decision after knowing the company had to make significant impairment on its investments and more may come in the future? (A quick calculation shows that the special dividend would leave the company with less than HK$50 million net cash.) Or had a special dividend always been planned and the management was only waiting for 'the right timing'? Did the major shareholder know the company would soon pay a special dividend when it raised its stake in China.com a day after the profit warning? Perhaps, Mr Chien, a celebrity-grade director who has pledged to uphold corporate governance standards, can enlighten us on this. Or the Securities and Futures Commission could get us the answers.