Unidentified asset and potential related party transaction of CMB 中巴未有披露的資產及潛在關連交易

Our letter to the board dated November 13, 2017

我們於2017年11月13日向董事局致函 (只有英文版)



November 13, 2017

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


Questions regarding CMB’s property at United Centre:  unidentified asset and potential related party transaction

My colleague told me that he – and other shareholders – felt that they were poorly treated at the annual general meeting on November 7th (“AGM”).

He had to beg the board, over the microphone, for about a minute, in the presence of media, before the board would answer questions.  Furthermore, the board was not introduced to the shareholders, as per customary practice, and the shareholders could not be sure if all the board members were present at the AGM.  Could you kindly confirm their attendance?

We were also perplexed as to why some guests were seated in an elevated area separated from the rest.  These “esteemed” guests seemed to have better access to the board.  Are they also shareholders and, if so, why did CMB give unequal treatment to different shareholders?

My colleague left the AGM with more questions than answers.  We have many follow-up questions for you.  The most pressing ones are related to CMB’s property at United Centre (統一中心).

This letter will be uploaded to our website:  UnlockValueCMB.com



Your unidentified property in Admiralty?

At the AGM, my colleague asked the board if CMB owns certain properties at United Centre in Admiralty, because the asset was not identified in the CMB’s 2017 annual report.  After much deliberation which was puzzling to us, the Chairlady finally answered “yes”.  This property is (at least partially) occupied by the Chairlady’s law firm, so it seems odd that it took the board – including the fair Chairlady – an inordinate amount of time to remember whether CMB is indeed the owner.


After the AGM, we went to the government land register.  We found out that a company called “China Motor Bus Company Limited” is the registered owner of Office Unit D, 24/F, United Centre (“Unit D”):

land search

According to a publicly-available deed of assignment dated June 4, 1987, Unit D was bought for HK$ 11,426,660.  The deed was signed by Mr. Ngan Shing-Kwan.


Unit D is big.  There are media reports that an entire floor of United Centre is approximately 20,000 square feet in area.  Based on a publicly-available floor plan, the area of Unit D seems to be roughly a quarter the area of the 24th floor:

floor plan

Unit D is extremely valuable.  There are media reports that an entire floor of the United Center was sold at HK$ 512 million in 2016.  Accordingly, in our opinion, Unit D could be worth in excess of HK$ 100 million now.


宏安5.12億購金鐘統一中心30樓全層, Mingpao, November 7, 2016

 These findings raise many uncomfortable questions:

  • Is CMB the beneficial owner of Unit D?
    • Is “China Motor Bus Company Limited” (which appears on the land register) the same company as CMB, the Hong Kong-listed company?
  • What is the gross floor area of Unit D?
  • What has the board done to optimize the value of Unit D?
  • How does CMB use Unit D – for rental income or for internal use?
    • If for rental income, how much rent is paid to CMB?
    • Are there any related parties using Unit D?  How much rent are each of them paying?
      • We note that Ngan & Co. (顏潔齡律師事務所), the private law practice of the Chairlady, is located at Unit D.
  • What is the value of Unit D on CMB’s balance sheet?
  • How do you classify Unit D, from an accounting perspective?
    • On what basis do you classify Unit D the way you do?
    • If Unit D is classified as “property held for investment”, then:
      • Why is this very valuable asset is not disclosed in the list of investment properties in the 2017 annual report (P. 68), in the same way you identify other investment properties?
        • We note that even smaller assets, such as the eight parking spaces at Island Lodge or the units at Chai Wan Industrial City, are clearly identified on P. 68.
        • When we tried to estimate the value of CMB’s assets based on 2017 annual report, we underestimated the value of CMB, simply because we did not know of the existence of Unit D until the AGM.
        • Are there any deficiencies or inconsistencies in your disclosure practice?  Are there any unidentified properties owned by CMB?
        • Why did KPMG opine that CMB’s financial statements “give a true and fair view” of the financial position of CMB (P. 21), when such a major asset as Unit D was not disclosed on P. 68?
        • Could it be related to certain below-market rental arrangements, which practically renders the value of the unit to be insignificant?
          • If so, how was such rental arrangement approved?
          • Is the rental arrangement a related party transaction?
    • If Unit D is classified as “other properties”, then it would be even more puzzling:
    • If Unit D is classified as “plant, fixtures and equipment” (“PFE”), then:
  • Does CMB have any other unidentified yet material assets, such as Unit D?
    • If so, why do you not identify them?
  • Are there any errors in your financial statements?  Is there a need to restate the financial statements?


Is there undisclosed connected transaction?

Based on public data from the Law Society of Hong Kong, Ngan & Co. (顏潔齡律師事務所), the private law practice of the Chairlady, is located at Unit D.


At the AGM, my colleague asked how much rent Ngan & Co. paid CMB, and how much legal fees CMB paid Ngan & Co.  The board did not give satisfactory answers and hastily ended the AGM.

This raises serious questions about related party transaction:

  • How long has Ngan & Co. been occupying Unit D?
  • How much space does Ngan & Co. occupy in Unit D?
  • How much rent does Ngan & Co. pay CMB per month?  Is the monthly rent determined as per normal commercial terms?
    • At the AGM, Mr. Anthony Grahame Stott (“Mr. Stott”), one of CMB’s directors, answered that Unit D is “basically a post box” for Ngan & Co.  He also said that “de minimis rent is paid on a commercial basis for essentially a post box”.
      • Mr. Stott’s responses were quoted by Mingpao:  “獨立非執行董事Anthony Grahame STOTT護航稱,中巴與御用律師顏潔齡沒有涉及任何法律費交易,出租予顏氏是按商業條款行事,主要供往來收發信箱之用” (November 8, 2017, Mingpao)
      • However, we have legal advice that every law firm must have an office in Hong Kong, which is not a mere “post box”.
      • Does Mr. Stott have the right understanding, that Ngan & Co. is using Unit D as mere “post box”?
        • If so, then we have never seen any post boxes of such size anywhere in the world.
    • Given the rising rental rate in Hong Kong over the years, the rent paid by Ngan & Co. should be increasing over time, if the rental agreement is really under normal commercial terms.  Is this the case?
      • In 2010, there were media reports that the rental rate at United Centre was merely $29 per square foot至於租賃市場方面,統一中心的空置率極低,單位每方呎租金叫價約29” (統一中心盡享地利優勢, Oriental Daily, January 14, 2010)
      • In 2017, based on records of real estate agency Midland (美聯), the current market rental rate at United Centre increases to approximately HK$ 40 – 50 per square foot.


  • At the AGM, Mr. Stott said that the legal fees paid by CMB to Ngan & Co. “have been zero for some years”, presumably to address related party transactions.
    • The 2017 annual report discloses that the Chairlady “is the sole proprietor of Ngan & Co., one of the company’s solicitors, and as such has an interest in legal fees and expenses paid by the company to that firm”.
    • Is Mr. Stott’s statement erroneous?
    • Has Mr. Stott and other independent directors been properly advised on the commercial relationship between CMB and Ngan & Co.?
    • If the 2017 annual report discloses that Ngan & Co., as a related party, has an interest in the legal fees, why is Ngan & Co.’s occupancy and tenancy at Unit D not disclosed in the same annual report?
  • Does the board consider these as connected transactions under the listing rules?
  • Did the independent board members review the rental agreement and the engagement with Ngan & Co.?

We hope to clarify our understanding with the management based on the public information available to us.  We will have more questions for you in our next letter.

Please respond to our questions before November 20.  If we do not receive substantive responses by that time, we will reach out your auditing team at KPMG to ask the same questions.  Given your reluctance to meet us, we will have no choice but to ask these questions at a public forum.

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

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