IT is one of the oldest recipes in the corporate cook-book, and one that leaves a very nasty taste. The cook - in this case a director of a Hongkong public company - acquires an asset in another country where valuation techniques are, to say the least, primitive. The asset is left on the back-burner for a reasonable length of time. An outsider's value is invited to add sauce. Everyone connected waits for the mixture apparently to rise. It is then served up to unsuspecting shareholders, disguised as a delectable item. The director, and no doubt members of the family firm who bought the property in the first place, take the profits. The public company acquires an often questionable asset. It has happened in every market in the world, and now the stock exchange and the Securities and Futures Commission are making it plain that they suspect it is happening here. In Hongkong's case the magic ingredient which enables pockets to be lined so easily is the China name. It has been the best game in town. Everything must go up, it is believed, and so shareholders feel content that their directors have been acting in the company's best interests by diverting funds produced from manufacturing, textiles or whatever else the company started out doing, and sinking them into the Chinese property gold mine. The problem is, it can be fool's gold. Even if the economy does not run into the ground, the quality of investment property varies enormously, and the shareholders do not know whether the parcel of land their money has bought is in the right place, or has been bought at the right price, or will give an acceptable yield. The message in yesterday's warning from the stock exchange and SFC is that investors should be cautious about any companies which are apparently finding gold in the mainland until they can get the answers to all these questions. There has never been a property bubble that has not burst, and the only winners when the echoes have died are those who have bought sound companies with sound assets, which have retained strong balance sheets. The good news is that the watchdogs are growling. They don't need a new set of teeth to enforce equitable treatment of shareholders in these circumstances. They have sharp enough incisors to use on offenders already. Directors who think they can bake up a very nice pie at the expense of the minority shareholders should think again.
