Electronic cigarette share sale in doubt

PUBLISHED : Saturday, 01 May, 2010, 12:00am
UPDATED : Saturday, 01 May, 2010, 12:00am

Cash-strapped electronic cigarette maker Ruyan Group (Holdings) warned that its plan to sell new shares to repay debt might be endangered after creditor BOC International sold some stock pledged by a majority shareholder.

Ruyan could become insolvent if it cannot go through with the share sale to raise HK$76.7 million and if it does not succeed in raising HK$250 million from a convertible bond issue. The firm has until July 31 to redeem HK$152 million of convertible bonds. It had HK$24.1 million in cash at the end of last year.

The company was previously controlled by a private firm called Absolute Target, which is controlled by several directors of Ruyan.

The move by BOCI, coupled with a share sale by another creditor, means Absolute Target is no longer the controlling shareholder, giving the share sale's underwriter, Get Nice Securities, the right to back away from the deal.

Hong Kong-based Ruyan said Get Nice 'initially considered that the change of shareholding of the substantial shareholders has triggered its right of termination under the terms of the underwriting agreement'. Get Nice may cancel the deal by June 3.

Absolute Target's stake in Ruyan was cut to 12.8 per cent from 23.3 per cent after BOCI's share disposal. BOCI gained a 10.6 per cent stake.

Still, Ruyan may be saved from bankruptcy. The company said earlier this week that Chung Nam Securities, the underwriter of the proposed HK$250 million convertible bond issue, has waived certain preconditions for underwriting the bonds.

The waived conditions included the toughest ones, such as Ruyan's total liabilities being not more than HK$30 million at the end of last year and that Ruyan succeeds in convincing all the holders of its HK$152 million worth of bonds to accept a redemption price of not more than HK$65 million.

Chung Nam has until June 30 to assess whether Ruyan can meet all other conditions of the bond underwriting agreement.

Given that the bonds to be issued are convertible to shares at 10 HK cents each, about half the last traded share price of Ruyan, 19 HK cents, existing shareholders' stakes may be heavily diluted by the bonds' future conversion into shares.

Ruyan's mainland-made electronic cigarettes are targeted at smokers who want to avoid the harmful effects of smoking. They vaporise nicotine that is absorbed directly into the lungs without having to burn it. The firm claims on its website the cigarettes 'provide the pleasures of smoking without the associated dangers' and that it sold more than one million units.

But sales plunged 79.3 per cent last year to HK$57.5 million after health authorities in North America, Israel and Hong Kong banned them until their safety, efficacy and quality could be established. Counterfeits and product returns linked to quality problems also hurt sales.

In July last year, US health officials said they had found cancer-causing ingredients in electronic cigarettes, but a US judge granted a preliminary injunction in January barring the government from trying to regulate them and prevent their import.

Ruyan's health-care products sales plunged 85.6 per cent last year to HK$14.97 million after product returns caused by a temporary failure to renew its good manufacturing practice licence.

The firm posted a net loss of HK$443.9 million last year and a loss of HK$132.1 million in 2008.

Redford Asset Management head of research Kenny Tang Sing-hing said losses of controlling stakes among locally listed firms due to sales by creditors of pledged shares have been few and far between since the 2008 financial crisis, compared with the 1998 and 2003 downturns.

'I think the quick recovery of asset prices and current super-low interest rates means banks are flooded with liquidity and do not have to aggressively settle bad loans,' he said.

Unhealthy plunge

Ruyan's health-care products sales fell this much last year: 85.6%