Our letter to the board 我們向董事局的致函

Argyle Street Management

Our letter to the board dated October 20, 2017

我們於2017年10月20日向董事局致函 (只有英文版)

October 20, 2017

Dear Members of the Board of China Motor Bus Company, Limited (“CMB”),

Creating value for all CMB shareholders

Despite having written to you many times in the past year, we have yet to secure an opportunity to meet with you to discuss our perspectives on and concerns for CMB.  We understand that you must be extremely busy but please be mindful that active shareholder engagement is an important pillar of good corporate governance.

In light of the upcoming annual general meeting (“AGM”), we would like to clarify and discuss various pressing concerns that are dear to us.  We raised these concerns in our written correspondences to you previously, but have yet to receive an adequate response.  We would like to meet you prior to the AGM to discuss these questions, so that you will be prepared for the discussion in the public forum.

Question #1 – Mr. Brooke’s relationship with Swire?

At the time when Swire was buying assets from CMB, you engaged Professional Property Services Limited (“PPS”) as your independent valuer. The Chairman of PPS is Mr. Charles Nicolas Brooke (蒲祿祺).

According to a 2017 interview, we learned that Mr. Brooke was once a senior Swire executive in the 1980s.  In the article, he was credited as one of the masterminds of Taikoo Shing – the foremost real estate development in Hong Kong – which was Swire’s flagship project:

縱橫地產界多年、現年75歲的蒲祿祺，80年代任職太古地產發展經理，主理多個大型物業發展項目，包括香港首個最大型的商住項目太古城。離開太古時，他晉升至副董事總經理，堪稱太古城發展的「元老」。

太古城40年前開售僅12萬漲價50倍, HK01 newspaper, March 3, 2017

We were pleased to learn about Mr. Brooke’s outstanding contribution to real estate development in Hong Kong.  We were, however, also surprised to learn that Mr. Brooke had an illustrious career at Swire, the same developer that has been so successful at purchasing the assets of CMB at seemingly low prices (see explanation below). We seek to understand the extent of Mr. Brooke’s relationship with Swire.

Question #2 – Possible conflict of interest?

Are there conflicts of interest – perceived or real –  in the sale of our headquarters at no. 391 Chai Wan Road (“Chai Wan Land”) to Swire?

As at December 31, 2014, the carrying value of Chai Wan Land was HK$ 805 million[1].

Six months later, CMB entered into a sale and purchase agreement to sell 80% stake in Chai Wan Land to Swire at HK$ 850 million valuation (on 100% basis). The selling price was merely 5% more than the land’s carrying value.

Importantly, PPS was engaged to re-value the land, for the purpose of the sale transaction.  Shareholders were then informed that the Chai Wan Land was only worth HK$850 million when it was sold to Swire.

Also, Mr. Brooke personally signed off the valuation report, which was published in your EGM circular dated June 23, 2015 (“2015 Circular”)[2].  At that time, shareholders voted in favor the sale, largely relying on PPS’ valuation.

We wish to highlight that 44% of the outstanding shares of CMB voted at that EGM on July 16, 2015.  As at June 30, 2015, the board members of CMB owned 42% of all outstanding shares.

Did the board adequately consider the possible conflicts of interest and adequately disclose them to minority shareholders at the time of the transaction?  Was the valuation indeed fair?  Were (and indeed, should have been) other competent (and perhaps more independent) valuers consulted?

Question #3 – Favorable deal for Swire?

Do you think that the selling price of HK$ 850 million significantly underestimated the redevelopment potential of the Chai Wan Land?

The gross floor area of the land is over 694,000 square feet (including both the residential and commercial portions).  The HK$ 850 million price translates to approximately HK$ 1,200 per square foot, which we think is low even by industrial land standards.  Furthermore, the land is in the process of being rezoned, thus wouldn’t a higher value be expected in the near future?  By buying the 80% stake, is Swire going to enjoy a significant profit from the redevelopment, especially as a result of the rezoning?  Wouldn’t it be better for CMB if the sale happened after the rezoning?  Shouldn’t there be many other developers, especially those with China links, who are keen to do a similar deal as Swire but on potentially better terms for CMB?

For comparison, shortly after your deal with Swire, the Hong Kong government sold a plot of industrial land in Kwai Chung – where land is generally cheaper than Chai Wan – through public tender at HK$ 2,200 per square foot:

本財政年度政府首幅推出的工業地皮剛開標，地政總署公布，葵涌永基路地皮由億京以8.3388億元投得，每方呎樓面地價2200元，較早前市場估值下限11.4億、每方呎樓面地價約3000元低27%，同時亦較去年2月推出的同區工業地以約4.49億元、每方呎樓面地價約3472元低37%。

億京逾8億奪葵涌工業地, Mingpao, August 17, 2017

Low price aside, do you think that your Swire deal was structured on terms that were too much in Swire’s favor? We seek your clarification here if our understanding below is inaccurate.

Firstly, Joyful Sincere (the buyer entity of the land, which is 80% owned by Swire and 20% by CMB) has only paid a small deposit, which was 10% of the consideration[3].  The remaining 90% of the consideration is to be paid on completion, which could possibly be three years from now[4].  Essentially, Swire gained control over the asset for a minimal amount of upfront cash outlay.

Secondly, for such low price and small upfront payment, Swire bears very low risk.  Specifically, Swire has the right to require CMB to buy back its 80% shareholding in Chai Wan Land at its cost, if either one of the following happens (“Swire’s Exit Right”):

  • The planning approval (granted by the Town Planning Board) “ceases to be valid”; or
  • Swire finds the premium payable under the basic terms of land exchange (補地價) unacceptable[5].

In other words, Swire has the option to walk away if things go wrong.  For example, if the Town Planning Board withdraws the planning approval because of extreme opposition from the local community, Swire can recover all of its investment – at the expense of CMB shareholders.  Or, for example, if the real estate market collapses and land price decreases significantly, Swire may probably use “unacceptable premium” as an excuse to walk away.

While CMB will enjoy some extra profit in a best-case scenario[6], do you really think that the special profit justifies the deal terms?  Are these terms normal for land transactions in Hong Kong?

Question #4 – Why not sell by public tender, like MTR does?

Did you try to sell the Chai Wan Land through a public tender, in the same way MTR Corporation (“MTR”) does?

For example, in February 2017, MTR awarded the development of the new Wong Chuk Hang station to a Chinese consortium through a public tender.  According to local media report, the tender was well-received:  39 groups indicated their interest in the project:

市區地搶手，港鐵（066）南港島綫黃竹坑站第一期項目昨日截收意向，結果破紀錄勁收39份意向書，當中最少有五分一為中資背景財團，包括近期天價買啟德地皮的海航集團、內房龍頭萬科置業（香港）及中海外（688）。

黃竹坑站地收39意向破紀錄, Apple Daily, January 24, 2016

The competitive tension created by public tender resulted in very favorable commercial terms for MTR.  Apart from high upfront land price, local media reported that MTR will enjoy a bonus profit of 35%:

據悉項目補地價金額逾46.84億元，平均每方呎約8,119元，分紅比例固定為35%，為鐵路項目有既定分紅來「最辣」項目之一。

中資500億擸5地王, Oriental Daily, March 1, 2017

The commercial terms secured by MTR are much more favorable compared with the smaller 20% profit sharing of the Swire deal you negotiated, which is additionally subject to a cap of $300mm.

Question #5 – You are silent on share buybacks and dividends

We have proposed, all along, that you should buy back shares and pay more dividends.

You have not yet bought back any shares in the past year, and the dividends remain miniscule.  We are extremely disappointed that the proposed final and special dividend is only $1.6 per share combined, which is only $0.1 per share higher than last year.

CMB’s share price is trading at a large discount to its net asset value.  The discount can easily be eliminated by share buybacks and dividends.

Our questions at the AGM

We would like the Board to address the following questions at the AGM:

Mr. Brooke:

  • Given Mr. Brooke’s close ties to Swire, why did you not choose another valuer for the sale of Chai Wan Land?
  • What steps did you take to verify the independence of PPS?

Chai Wan Land and Swire:

  • Did you try to sell Chai Wan Land through a public tender, in the same way MTR does?  If yes, what steps have you taken?  If no, why not?
  • What steps did you take, to justify the seemingly favorable and unusual commercial terms offered to Swire (as explained above), especially with respect to the terms that allow Swire to walk away from the purchase if there is downside to their purchase?

Succession:

  • Given the age of the Ngan family board members, what are your succession plans?

Capital expenditure and projects:

  • How much capital expenditure has been spent on the development of our Wong Chuk Hang project?
  • What are the remaining capital expenditure requirements for the development of our Wong Chuk Hang project?
  • The pre-leasing of Wong Chuk Hang project has begun.  What is the net leasable area?  What is the estimated rent per square foot of net leasable area, based on the feedbacks of your agents?
  • Based on current market data, what is your current estimate of the premium payable for Chai Wan Land?  What is the basis of your estimation?
  • What is the current estimate of the construction cost for Chai Wan Land?  What is the basis of your estimation?
  • What is the gross floor area of your office building at 625 King’s Road?  How much do you value this asset, and what is the basis?

Directors:

We hope to clarify our understanding with the management based on the public information available to us.  We are disappointed at the inadequate response from the management so far.  Kindly contact me at +852 9835 4836 any time at your convenience.  Again, we earnestly request you for an opportunity to meet.

Yours sincerely,

Kin Chan

Argyle Street Management Limited

 

[1] Please refer to the 2015 Circular.

[2] We are not suggesting any wrongdoing on the part of Mr. Brooke.  In fact, we admire his visionary planning of Taikoo Shing.  We also applaud his contribution to Hong Kong, through his advisory role with Our Hong Kong Foundation (團結香港基金).

[3] Please refer to the 2015 Circular.

[4] According to the 2015 Circular, the completion of the sale of Chai Wan Land could be as late as “the expiry of 50 months (extendable to 62 months…) after the Shareholders’ Approval has been obtained”.  In this context, the Shareholders’ Approval was obtained on July 16, 2015.

[5] Please refer to the 2015 Circular.

[6] Based on the 2015 Circular, if the total project profit exceeds 25% of the total project cost, 20% of the excess profit (subject to a HK$ 300 million cap) shall be paid to CMB.

[7] 中巴三姊弟力守$70億金礦, Next Magazine, September 25, 2017