IF Watary International Holdings' electronic Talking Parrot product were to describe how the firm's manufacturing business was faring, it might say 'poor Polly'. When Watary was floated in late 1992 the company was just starting to ride a wave of success with a range of electronic game machines with an exchangeable cartridge. Competing against Japanese giants Sega and Nintendo, Watary was able to produce credible products which sold far more cheaply - the group set its sights on China and eastern Europe and for a while profits soared. But the gravy train ran out of track quickly and after reporting profits down 78 per cent for the last fiscal year to March 31, it lost $25.02 million for the six months to September 30. Boom and slump has long been a threat to firms with me-too businesses - albeit that Watary has the patents on its own designs of electronic and computer games. Hong Kong companies such as Watary survive on the ability to find a new product and re-engineer it to cheap mass production, taking advantage of the cheap labour formerly available in Hong Kong and now in China. Competition is fierce in the sector in which Watary has operated since 1976. Margins are quickly slashed and markets soon saturate as the price of brand-name goods comes down. 'The directors believe the operating loss for the last period was mainly due to the continued soft worldwide market and keen competition in the electronic games industry,' said company secretary John Ho Hon-ming. 'The loss was aggravated by relatively high operating costs and provisions for slow moving and obsolete stocks.' At the last balance sheet date of March 31, the company was carrying $75.88 million of stock, flat from the previous year, but the volume of stocks as finished goods increased from $18.18 million to $30.62 million, while raw materials were almost flat at $38.12 million. Mr Ho said the manufacturing losses were set to continue and managing director Horace Cheng Lung-don said the company was streamlining, restructuring and cutting costs - a far cry from the original prospectus in which the company wrote of plans for a network of sales and distribution offices in China and for more engineers and technicians to keep the firm at the technological cutting edge. So Watary has not been able to afford to stand still. And sure enough, along with the announcement of the interim loss the company is planning to tap its shareholders in a $123 million rights issue. The lion's share of the cash, some $70 million, is to be spent on developing a money-lending consumer finance business while a further $30 million is to be spent on developing the fledgeling brokerage Watary bought in September. Only $20 million will be spent on manufacturing operations and Mr Cheng is reticent on the progress of the firm's rumoured new product, a virtual reality headset. He will not even say whether the product works or is makable and denies rumours that a marketing deal has been signed with a British company. The headset is said to seek to undercut the high price of the few on the marketplace by using a single-strip of liquid crystal display instead of one piece for each eye. Despite the spending on entirely new business areas, Mr Cheng said the developments were not a change of direction for the firm but diversifications. Management and ownership have changed, however. In January, the Magnum Group of Malaysia, in turn controlled by the Multi-Purpose Group, bought into the company from then controlling shareholder Jack Lee Chun-wing, who still retains a small stake. Multi-Purpose and Magnum are involved in a host of operations centred around number prediction and horse-racing. Multi-Purpose also includes property development, commercial banking, ship chartering, hotel and resort operation and chip board manufacture in its activities. Magnum is behind a high-priced Beijing club for businessmen and cadres and is trying to break into the Chinese market for 'games of skill'. Magnum bought 144 million Watary shares at $1.165 each, representing just over 35 per cent of the company, in November last year. At that time Watary shares were trading at between $1.31 and $1.47 and by the time Magnum's general offer at the same price closed in January this year, the price was $1.55. Watary was floated at $1.25 a share. Not surprisingly, there were no acceptances for the Magnum offer and Magnum had effective control of the company. Mr Lee and his son remain as chairman and vice-chairman and they have service agreements which run to September next year. New additions to the executive are Lim Sze Guan, Lau Kin-yen, Cheah Yoke Phow and Wong Cheong Leong. Mr Cheng said the new board members brought knowledge of banking and broking from Malaysian operations of the new parent. But the securities business, Magnum International Securities (MIS), and the consumer finance business, Magnum International Finance (MIF), are virtually straight off the shelf. MIF has so far done only a tiny amount of lending, according to Mr Cheng. 'Just some margin finance for shares,' he said. MIS was incorporated as Quoba Securities last year and obtained a seat on the stock exchange this year. Watary acquired 70 per cent of Quoba in September for $10.3 million in shares and has an option on the remaining 30 per cent. This was good deal, Mr Cheng said. 'If we had bought when the [Hang Seng] index was up at 12,000 [points], a seat on the exchange would have costs us $13 million or $14 million.' MIS was also still a start-up operation, he said. 'It has a few private clients, high net worth individuals.' Mr Cheng will say no more because of the imminent rights issue and issue of prospectus. The company has slumped from a year's high of $1.76 to last Friday's intra-day low of 58 cents and close of 60 cents. The rights issue is being underwritten by Magnum and when originally proposed was at 20 per cent discount to the closing share price of Watary of 75 cents a share. The announcement of the issue caused prices to plunge, first to 60 cents and, with the market withering, below the rights price. The independent shareholders of the company are entitled to vote on the rights issue. Standard Chartered Asia has been hired as independent adviser to non-executive director Larry Kwok Lam-kwong who will advise shareholders. If the issue is approved but the minority shareholders do not take up rights, then Magnum will be left holding 56.5 per cent of the company, exerting absolute control.