New World China asset sale to director raises questions

How do you flip an asset in five months and reap a 200 per cent gain?

Ask William Doo Wai-hoi, a vice-chairman of New World China Land. He has just sold a Shanghai project that he had acquired from New World to a mainland firm at three times its original valuation.

Given the huge price difference, the natural question is whether New World sold it too cheaply to Doo, who is also the son-in-law of Cheng Yu-tung, New World's controlling shareholder.

The property fever of the past few months provides a plausible reason for the price discrepancy. However, as one digs into the details, investors do have grounds to ask questions.

The asset in question is Hong Kong New World Garden, a yet to be developed residential project in Shanghai. Together with another minor project, it was sold by Doo to Stellar Megaunion Corp, a Shenzhen-listed shell company, in return for a controlling stake in Stellar.

A mainland appraiser put the value at 6.6 billion yuan (HK$7.49 billion). Doo is selling it for 5.8 billion yuan.

Doo, who initially held 30 per cent of the project, bought the remaining 70 per cent through two separate deals from New World in December last year and June for a total of 1.3 billion yuan. New World valued the project at about 1.9 billion yuan, although an independent appraiser put the value at 4.5 billion yuan in December and raised it to 5.2 billion yuan six months later. New World did not explain why it had chosen not to price the project according to the independent appraisal.

The 200 per cent gain far exceeds the rise in property prices during the period - 16 per cent as reflected by the Shanghai Residential Index.

The New World management can certainly say it was a matter of judgment. The question is what factors prompted it to make that judgment.

In the circular on the June sale, New World pointed to the uncertainty in the project's development timetable, its huge cost, the post-crisis market remaining unfavourable to fund-raising and the flexibility offered by the sale proceeds.

These explanations were fully accepted by the independent financial adviser. Yet, they are not free from challenges.

While New World emphasised financial stress from the project, its share price and the Hang Seng Index had, back then, rebounded 180 per cent and 25.58 per cent, respectively. It had also secured a HK$700 million bank loan late last year.

As for the timetable of the project, it is interesting to see a project that had 'no timetable' has turned into one with not just a clear schedule but also a profit forecast in less than five months after the sale. Doo now estimates a profit of 1.9 billion yuan by 2012.

So why did New World sell?

With that question in mind, I went through related filings in Hong Kong and Shenzhen. Instead of getting an answer, I have more questions.

First the facts. Wind the clock back to June last year. New World announced a reorganisation that involved three joint ventures with Doo - among them New World Garden - in order to acquire a mainland listed firm. New World and Doo would jointly own the company that would control the A-share company.

The identity of the A-share company has never been revealed by New World. But Stellar has announced that New World was its white knight.

In December, the reorganisation was called off. New World management said it had failed to win regulatory approval to acquire Stellar. Instead, it sold 20 per cent of New World Garden to Doo.

However, Stellar denied all along that New World had quit the deal and maintained that discussions carried on until April 8 this year.

On that day, Stellar made it public that Doo had replaced New World as its white knight because the company was concerned about a significant change in the property and stock markets following the financial crisis.

On April 28, Stellar's shareholder meeting passed a resolution to accept Doo as its white knight. The next day, New World announced the plan to sell 50 per cent of New World Garden to Doo.

The sale was crucial to Doo's acquisition of Stellar because it gave him total control of New World Garden. Without that control, it would have been technically impossible for Doo to acquire Stellar under current mainland regulations.

New World shareholders have no way of judging whether the company asked for the best price. None of the Doo involvement in Stellar after December has been disclosed in filings.

Given the deep involvement of Doo in the negotiations with Stellar from day one and all the coincidence of timing, there are lots of unanswered questions.

What role did Doo play in New World's decision to quit the acquisition?

Was New World's board aware of Doo's continued involvement with Stellar when it decided to quit the acquisition, to sell 20 per cent of New World Garden, and then the remaining 50 per cent to Doo? What has been done to address the apparent conflict of interest?

I am sure New World sees no relevance in these questions. After all, the sales have been recommended by the independent financial adviser and approved by independent shareholders.