Companies sitting on cash piles invite questions
The controversial sale of Boto International's core business for HK$1.06 billion in August prompted some commentators to ask whether the firm should be treated as a cash company and should therefore be delisted.
The cash company question popped up again last week after toy manufacturer Rockapetta Holdings proposed the disposal of its core business to two independent investors for $25 million in cash.
Rockapetta said it would use about $2.22 million to acquire a wines and spirits distribution business from substantial shareholder Peter Lim Eng-hock and other parties.
There is no strict definition but a cash company is usually taken to mean one which has no concrete principal business but is sitting on a pile of money.
Rockapetta probably has a better case than Boto because the old toy business has suffered from significant losses for three consecutive years, while the new business is making a profit.
Between April 1999 and June this year, the toy business bled about $96 million. The targeted wine and spirit business on the other hand recorded a pre-tax profit of $71,000 for the 15-month period to March 31.
Boto sold a majority stake in its artificial Christmas tree and leisure furniture business, which made more than $160 million net last year, and refocused its efforts on a start-up computer animation business, which had losses of $8 million that same year.
But Rockapetta's case still raises concerns about how the exchange should deal with firms which do not seem to have a clear principal business but are holding a lot of cash.
After the core business sale, Rockapetta did not declare a special cash dividend.
Instead, the company said it planned to use the remaining $23 million as working capital to finance the new food and beverage and other 'high potential' businesses.
Analysts are less than impressed with the plans.
'From an investors' point of view, the company should explain how it will use the cash in a more specific way,' Tung Tai Securities associate director Kenny Tang Sing-hing said.
'The company should also explain why it decided not to declare a special dividend.'
He said in such cases investors deserve a cash dividend as these cash companies usually traded below their net asset values.
Another concern is if the food and beverage business can sustain a listing status.
Rockapetta also bought wine business Crystal last month and a 51 per cent stake in Singapore-based brewery restaurant operator Brewerkz in May.
The newly acquired businesses have produced a meagre income for Rockapetta thus far, however, and have both also recorded a substantial drop in profits in the past year.
For the 15 months to March 31, Crystal made a profit of just $71,000, down from $1.09 million for the fiscal year of 2000.
Last year Brewerkz's net profit plunged 71 per cent year on year to $386,000.
Last week, the stock exchange said it was reviewing whether Rockapetta met its listing requirements in the light of its new business focus.
However, the company yesterday said it had completed the disposal of its core business, suggesting a green light had already been given by the exchange.
