Hong Kong Stock Exchange

PR raises question of conflicting interests as it ties remuneration to clients’ share price performance

Shenzhen PR firm Zhixing has been awarded options by several Hong Kong-listed companies

PUBLISHED : Sunday, 11 September, 2016, 9:41pm
UPDATED : Monday, 12 September, 2016, 11:02pm

A Shenzhen public relations firm is at the centre of see-sawing price movements in several Hong Kong-traded stocks -- and is getting paid for boosting its clients’ market capitalisation -- raising questions whether it might have overstepped the boundary between proper advice and conflicting interests.

Zhixin Caijing, a Shenzhen-based public relations firm, came under the spotlight in July after China International Capital Corp. cut its recommendation of China Maple Leaf Educational Systems Ltd. when it was disclosed that Maple Leaf had awarded options to buy 17.5 million of its shares to the PR firm.

Maple Leaf, which runs international schools in several Chinese cities, had awarded options to Zhixin on June 8, 2015 at an exercise price of HK$4 per share while its stock was trading at HK$2.83 each, with a market value of HK$3.8 billion, according to filings.

The PR firm could exercise two-fifths of the awarded options if Maple Leaf’s capitalisation were to double to no less than HK$8 billion for 15 consecutive days, while the remaining options can be exercised when the market value is at least HK$10 billion for 15 days, according to the filings.

For its work over three years, Zhixin could make a total of up to HK$80 million, or HK$26.7 million per year, if it were to sell Maple Leaf’s stock at the 52-week high of HK$8.57 per share.

That’s more than most public relations firms, which typically charge between HK$500,000 to HK$1 million a year for organising press events or investors relations.

Oscar Wang, the Shanghai account director at Ryan Communication, said that it’s not normal for PR firms to accept options as payment.

“It’s not the role of the PR to take care of market value,” he said.

Maple Leaf wasn’t the only company to reward its PR agent for boosting its market value.

BAIOO Family Interactive Ltd. and Kingworld Medicines Group Ltd. have all disclosed awarding options to Zhixin, which can only be exercised once their market value reach a certain level.

BAIOO’s chief financial officer Carl Yeung said the company, which provides interactive web and e-learning games for children, believes its share price is “seriously undervalued,” and that Zhixin could “positively affect its share price.”

Listed in April 2014 at HK$2.15 per share, BAIOO’s shares have been hovering between 37 HK cents and 40 HK cents in the past month with a market value of about HK$1 billion. According to an April filing, BAIOO would pay Zhixin a monthly retainer of HK$30,000, and grant the PR firm options to buy 10 million shares at 70 HK cents each, compared with the stock’s closing price of 44 HK cents on April 20.

The options can be exercised in entirety if BAIOO’s capitalisation were to exceed HK$3.7 billion.

“Zhixin’s main job is to create exposure to mainland investors and the media, aiming to boost the stock’s liquidity and price,” Yeung said. Granting stock options as payment for services rendered did not breach any stock exchange regulations, he said.

To be sure, Zhixin did its job for Maple Leaf. The school operator’s shares more than tripled this year in Hong Kong to a record HK$8.57.

After it disclosed the options awarded to Zhixin, Maple Leaf’s shares tumbled 22 per cent on July 29, plunging by 34 per cent over four trading days.

Such a practise is rare in Hong Kong, and may be stepping over the line, said Ricky Tam, the chairman of the Hong Kong Institute of Investors.

“The PR firm is behaving like a hedge fund, as it collects fees based on share performance,” Tam said. “They are not licensed to deal in securities.”

Rewarding PR firms for boosting share price performance, and tying that remuneration to that performance, could create a “serious problem”, said Tam.

At the very least, the PR company should disclose to investors and shareholders that it stands to benefit from the stock price performance that results from a client’s events, he said.

Overseas equity funds that owned stock in Maple Leaf raised concerns over the options granted to Zhixin, according to an investor’s meeting note obtained by the Post.

Maple Leaf’s management said it didn’t grant the options, even though it had filed the agreement to the Hong Kong Stock Exchange, according to Nomura Research Institute’s July 29 note.

“Maple Leaf maintains that it has not granted these options even though the first market capitalization target has been achieved,” according to Nomura. “The company stated that there are service-related requirements that have not been met, and as such it believes that the consultants it has employed should not be granted the options as compensation.”

Zhixin’s management in Shenzhen did not respond to the Post’s requests for comments.

Brett McGonegal, chairman at Capital Link International, said equity options is a good way of aligning interests with business partners, and provides an incentive for companies to help raise equity value through their contact and services.

However, he cautioned that it may also create a conflict of interest if the reward is tied directly to the outcome.

“It is also offering a chance for vendors to manipulate the public perception of the company in the hope to increase the value of their option, such as putting out false or misleading press releases,” he said.

The Hong Kong Securities & Futures Commission, which is the city’s securities regulator, declined to comment.

Andrew Lam, Hong Kong-based director at accounting firm BDO International, said the practise was within the regulations for publicly traded stocks on the city’s bourse.

The practise “will possibly encourage some grantees to focus on short term objectives such as profit or share price, at the expense of long-term benefits of the company,” he said.