Cash-rich Hong Kong developer CMB surges after hedge fund challenge over undervalued stock

PUBLISHED : Thursday, 26 January, 2017, 3:19pm
UPDATED : Thursday, 26 January, 2017, 3:24pm

Shares of China Motor Bus, a Hong Kong property developer, have surged more than 15 per cent in the past two days to a record high after an activist fund manager urged the company’s controlling shareholder to buy back shares and pay more dividends to investors, claiming that the stock has been undervalued for years due to “poor effort” by the management.

CMB shares rose 3.7 per cent to a new all-time high of HK$112 as of 1.40pm Thursday, after soaring 13.6 per cent on Wednesday. The gains came after media reports that Argyle Street Management, a Hong Kong based fund manager that holds 3 per cent of CMB, issued a letter in early January asking the board to buy back shares as they were hugely undervalued.

The net asset value of CMB should be HK$233.7 per share based on conservative assumptions of property market data, while the company reported only HK$167.9 per share of total equity as of June 30 last year, the fund house said in the letter which was obtained by the South China Morning Post. The letter also said the decision to hire a little-known surveyor was “perplexing”, hinting that this may have contributed to the asset undervaluation.

The assets include office buildings, residential units and land in Hong Kong and London.

Argyle Street estimated that CMB holds HK$2.6 billion in cash, or HK$57 per share, claiming that such a large sum in cash is unnecessary for a mature developer with income-generating projects and various financing tools.

The board of CMB has not responded to the issue yet. The company, controlled by chairman Ngan Kit-ling and her family, was first listed in 1988 as a bus operator. It has a market value of HK$5 billion based on its closing price at Thursday lunchtime.

We are increasing our shareholding and are reaching out to other shareholders, including some hedge funds, to initiate a general meeting for a vote
Fund manager, Argyle Street Management

“We are increasing our shareholding and are reaching out to other shareholders, including some hedge funds, to initiate a general meeting for a vote,” a fund manager from Argyle Street, who requested anonymity, told the Post. The Ngan family holds 41.8 per cent of the shares of CMB, according to public data available at the Hong Kong exchange.

The Argyle Street fund manager said a share repurchase was the best outcome for the Ngan family and other shareholders.

“We are open to all kinds of strategic and tactical alternatives,” he added.

Hong Kong’s most well-known recent case of a shareholder activist challenging a cash-rich company was US hedge fund Elliott Management, which has battled with Bank of East Asia and its controlling shareholders David Li Kwok-po and family. The two parties are still involved in legal disputes.

In 2002, CMB came under attack from Hong Kong Industrial Limited which launched a hostile takeover bid, with CMB countering the bid by offering a special dividend to investors.

Last year Argyle Street managed to force another Hong Kong developer, Dan Form Holdings Company, to repurchase shares and pay dividends to investors, ultimately selling the firm to Tian An China Investments Company. Argle Street Management’s chairman V-nee Yeh was the co-founder of Value Partners, a leading wealth management house in Asia.