Town Health Warning

Turning our sights to the GEM, we find that newly listed Town Health, blessed with a deep-discount investment from Cheung Kong, has suddenly found the perfect acquisition, just 4 weeks after its listing, from someone who should have been identified in the prospectus. What's more, the Vice Chairman had an undisclosed interest in the target, a top-five supplier to the Group.

Town Health Warning
19th November 2000

Browsing through our pile of fresh prospectuses the other day (this is our idea of entertainment), we noticed a few unusual aspects to Town Health International Holdings Company Ltd (Town Health). This company bills itself as:

Great, you might think, another doctor's chain to provide an alternative to Quality Healthcare Asia. Private healthcare is the future, right? We'll tell you why we wouldn't touch this company through three pairs of latex gloves.

The missing shareholder

One thing that caught our eye in the list of "initial management shareholders" was a BVI company called Jacobson Medical Corporation (Jacobson MC). This company was 15% owned by Town Health's executive director Derek Sum Kwong-yip (Mr Sum), and 85% owned by a person known only as "the 85% shareholder of Jacobson" or "the controlling shareholder of Jacobson". This was despite the fact that the mystery person was deemed to be an Initial Management Shareholder and is subject to a 6-month lockup on the shares.

Now whenever we see efforts to avoid disclosure, alarm bells ring. Regular readers will recall that we saw a similar omission from the Panda-Recruit prospectus, and it turned out that the missing link was a director's family trust.

Jacobson MC owns 34,924,479 shares in Town Health, or 8.72% of the company. It acquired them from Dr Cho Kwai Chee, the group's Chairman and Founder, as a result of an exchangeable note which he agreed on 10-Dec-99 to sell to Jacobson MC for $16,440,813. On 30-Sep-00 the note was exchanged for shares. The average price per share is about $0.471.

Mr Sum, a pharmacologist, is also the Managing Director of Jacobson Medical (Hong Kong) Limited (Jacobson HK), which is described as "an associate of Jacobson [MC]". He has also been an executive director of HK-listed printed circuit board maker Suwa International Holdings Limited (Suwa) since 3-Jan-00. Mr Sum was promoted to Vice Chairman of Town Health on 13-Nov-00.

Not only was Jacobson MC an Initial Management Shareholder of Town Health, but the prospectus disclosed that "one of [the] five largest suppliers is controlled by the controlling shareholder of Jacobson [MC]", still without telling us who that controlling shareholder was. Those five suppliers accounted for 51% of the Group's total purchases of pharmaceutical products in the year to 31-Mar-00.

Four weeks later...

On 16-Nov-00, four weeks after Town Health began trading on the GEM, the company announced (PDF format) the proposed acquisition of 80% of Jacobson HK for HK$18.144m in cash. Jacobson HK has net assets of just $1.16m and made a loss after tax of HK$750,913 in the year to 31-Mar-00.

The announcement disclosed that Mr Lau Wing-hung (Mr Lau) was the 85% shareholder of Jacobson MC whom the prospectus had omitted to name. Webb-site.com can also reveal that Mr Lau, who is also known as Johnny Lau Wing-hung, is the Chairman and largest shareholder of Suwa, of which Mr Sum is a director. It's all beginning to make sense.

In addition, it now became clear that the top-five supplier referred to in the prospectus was none other than Jacobson HK, of which Mr Sum is Managing Director. Not only that, but what we are now told is that Mr Sum is beneficially interested in 10% of Jacobson HK. That's a direct contradiction of the statement in the prospectus, that none of the Directors had any interest in any of the Group's five largest suppliers.

In fact, of the 80% of Jacobson HK that is being sold to Town Health, 70% comes from Mr Lau and 10% from Mr Sum. However, one quarter of the payment goes to Mr Sum, so in effect, he's getting a commission of HK$2.268m on Mr Lau's sale, thereby doubling his proceeds.

The IPO raised only HK$38m, net of expenses, so almost half of this amount is being spent on Jacobson HK. We are asked to believe that Town Health and its directors had no intention of making this acquisition when they closed the IPO on 12-Oct-00. What a difference a month makes.

Cheung Kong's blessing

The tiny IPO was massively oversubscribed, and on first glance you might think this was a rare GEM success story. After all, the shares soared from the IPO price of $1.25, reached $4.70 and are now at $2.25. But a lot of this enthusiasm may be attributable to the fact that Li Ka-shing's Cheung Kong (Holdings) Ltd (Cheung Kong) had blessed the deal with an investment of its own money. The IPO was sponsored by CEF Capital and First Shanghai Capital. CEF is 50% owned by Cheung Kong.

Look harder and the story is less impressive. Cheung Kong agreed back on 6-Jul-00 to subscribe 9.9% of the post-float shares, for up to $9.9m. That works out at just $0.25 per share, and the subscription was not completed until 3-Oct-00, just 6 days before the prospectus was published. The payment was to be determined by reference to "the market capitalisation upon listing" - in other words, by reference to the IPO price - and adjusted downwards if necessary. Luckily this turned out to be $1.25, so Cheung Kong paid the full $9.9m and got the shares at a whopping 80% discount.

On top of the share subscription, on 20-Sep-00 Cheung Kong also agreed to subscribe a convertible note in Town Health, to be issued on 17-Oct-00, the day before dealings in the shares began. The note for HK$31,562,500 is convertible until 31-Jul-02 at $0.625 per share, or a 50% discount to the IPO price. If the note is not converted by Cheung Kong, then Town Health has to redeem it on maturity at 125% of principal - in other words, the yield to maturity is about 13.31% per annum. No coupon was specified in the prospectus so we presume it is interest-free. If Town Health fails to redeem the bond, then interest becomes payable at 15% per annum.

We thought that's what estate agents are for. It reminds us of Timeless Software's famous explanation of why they were blowing 40% of their IPO money on the 79th floor of Cheung Kong's development in Sheung Wan.

So there you go - if you think Cheung Kong's endorsement makes Town Health a good deal, well maybe for them, at $0.25 per share, but not at the IPO price. It is high time the public woke up to the idea that what's good for a tycoon is not necessarily good for them. This is not the first time - remember that the Li Ka-shing Foundation was also an investor (at a 26% discount) in iSteelAsia.com, which now trades at 53% below its IPO price.

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