Hong Kong Financial News

From an announcement today, all directors (executive, non-executive and independent non-executive), except one, are the subject of investigation by the SFC. The only one director not being investigated is Peter Kruyt, who is just an alternate director to Mr. André Desmarais.

The entire list of directors being investigated are: Messrs. Larry Yung Chi Kin, Henry Fan Hung Ling, Peter Lee Chung Hing, Carl Yung Ming Jie, Vernon Francis Moore, Li Shilin, Liu Jifu, Milton Law Ming To, Wang Ande, Kwok Man Leung, Willie Chang, André Desmarais, Chang Zhenming, Hamilton Ho Hau Hay, Alexander Reid Hamilton, Hansen Loh Chung Hon and Norman Ho Hau Chong.

January 3rd, 2009 | Tags: 267, CITIC Pacific, directors, SFC investigation | Category: Companies | Leave a comment

Not surprisingly, the proposal for issuing convertible bonds to CITIC Group was approved with a high approval rate of 99.9% in yesterday’s EGM! In the meeting, both David Webb and James To were present to ask questions to (at the same time criticize) the Management.

On another note, it seems like Larry Yung Chi Kin will not resign soon. He told journalists that the question whether he will leave CITIC Pacific or not is a question for the shareholders. Will the majority shareholders vote against Larry Yung in the next AGM? Apparently not!

December 20th, 2008 | Tags: 267, CITIC Pacific, David Webb, James To Kun Sun, Larry Yung Chi Kin | Category: Companies | Leave a comment

It was reported that there were around 10 retail shareholders, led by LEGCO member James To Kun Sun,  protesting outside CITIC Pacific’s EGM today. They demanded that the company should delay approving the plan of issuing convertible bonds to CITIC group and accepting the rescue plan put forward, until the SFC has finished investigating the whole accumulator saga. Also, they demanded that the directors in-charge should be personally held responsible for the matter. They were refused entry into the meeting at the beginning, but at the end they were let in.

I am not sure whether delaying approving the measures would help the small shareholders recover their losses. Letting this type of thing dragging on will just create an overhang for the stock price and does no good to the Company. On the other hand, the directors, if they are deemed to have done anything wrong by the SFC, should bear personal responsibilities and resign (and be charged criminally).

December 19th, 2008 | Tags: 267, CITIC Pacific, EGM, James To Kun Sun, Protest | Category: Companies | Leave a comment

CITIC Pacific is up 12.86% today, closing at HKD 8.25. The company has issued an announcement saying that they are not aware of any reason for the huge increase today.

There are actually two possible reasons for the increase. First, tomorrow CITIC Pacific will hold a EGM (Extraordinary General Meeting) for all shareholders for approving the rescue transaction between the Company and its parent, CITIC Group that was revealed back in November (http://www.hkfinancialnews.com/?p=96). There is no doubt that this will be approved tomorrow as it is beneficial to the Company.

Secondly, AUD has actually risen back a lot in the past few days. Currently it is trading at  1 AUD = 0.70 USD, much higher than the rate a month ago at around 1 AUD = 0.60 USD. The accumulator contracts that they have with banks will lose less money. On the other hand, it is the parent company, CITIC Group that will bear the loss if AUD drops further. So rising AUD is, in overall, good to CITIC group, but only neutral to CITIC Pacific. Therefore, rising AUD should not be a logical reason for the share price increase.

December 19th, 2008 | Tags: 267, Australian Dollar, CITIC Pacific, EGM | Category: Companies | Leave a comment

CITIC Pacific has resumed trading today and it has dropped 7.3% and ended the day at HKD 5.59.

CITIC Pacific released a circular yesterday and included some of the foreign exchange accumulator derivative contracts that CITIC Pacific had signed with various banks as exhibits. (The documents are available at http://www.sfc.hk/dod/jsp/EN/DoDmain.jsp?StockCode=00267)  As discovered  by the media, contrary to what the board of directors claimed that they were not aware of the contracts until September this year, one of the directors, Vernon Francis Moore, actually signed on some of the contracts back in 2007. He should know about the contracts for a long time. Currently SFC the regulator is investigating this case; Mr. Moore will definitely have some explaining to do when the regulator calls him.

While the people who are said to be involved in this case (e.g. Francis Yung) have either been demoted or moved to other part of the Company as disciplinary actions, Mr. Moore is keep his position. What’s going on here?

December 4th, 2008 | Tags: 267, accumulator, CITIC Pacific, foreign exchange derivative contracts, Vernon Francis Moore | Category: Companies | Comments (1)

While I was reading through the 26 page announcement made by CITIC Pacific on how their parent company would rescue them, I found out the difference between the two derivative products that CITIC Pacific was buying: daily accrual forward contracts and target redemption forward contracts. In the announcement, the daily accrual forward contract is described as follows:

Under the AUD daily accrual forward contracts, the strike rate (i.e. the rate at which deliveries of currencies are made) and the accumulation/ knock-out rate (i.e. the rate at which no delivery of currencies will be made if such rate is lower than or equal to the spot rate) are fixed. A notional amount of AUD will be delivered at the relevant instalment dates at the strike rate if at the relevant time, the spot rate is between the strike rate and the accumulation/ knock-out rates. In the event that the spot rate is lower than the strike rate at the relevant time, a pre-determined amount of AUD (which is greater than the notional amount) will be delivered.

And the target redemption forward contract is described as follows:

Under the AUD target redemption forward contracts, the strike rates (which may have a step-up feature (i.e. to reflect an appreciation of the currency over the term of the contract)) are fixed. If the spot rate on any given day during the contract period is equal to or above the strike rate, a notional amount of the AUD will be delivered at the strike rate. The difference between the strike rate and the spot rate will be treated as a profit in respect of that particular contract and when the cumulative profit reaches the maximum profit stipulated in the contract, that particular contract will be knocked-out (i.e. the obligation to deliver further currencies will cease). If the spot rate is below the strike rate, a pre-determined amount of the AUD (which is greater than the notional amount) will be delivered at the strike rate.

They both sound very similar, don’t they? The main difference is how these contracts will be knocked-out. In the first one, as long as the FX rate has reached the knock-out rate, the contract will expire. In the second one, there is not such knock-out rate. There is, however, a target redemption rate: once the culmulative profit of the contract has reached the target redemption rate, e.g. 50% of the principal, the contract will expire. One can see that with the current depressed AUD exchange rate, the chance of the contracts in both variations knocking out is very very slim.

For more details on this Citic Pacific saga, you can check out the following posts:

http://www.hkfinancialnews.com/?p=96

http://www.hkfinancialnews.com/?p=94

http://www.hkfinancialnews.com/?p=89

http://www.hkfinancialnews.com/?p=83

http://www.hkfinancialnews.com/?p=82

 http://www.hkfinancialnews.com/?p=81

Finance Asia also has an article explaining the rescue: http://www.financeasia.com/article.aspx?CIaNID=88950

November 15th, 2008 | Tags: 267, CITIC Pacific, daily accrual forward contracts, Target Redemption Forward Contracts | Category: Companies | Leave a comment

Maybe this is Chinese family value. Citic Group, the parent company of Citic Pacific, is assuming all liabilities of Citic Pacific’s FX derivative trades and giving Citic Pacific a loan of HKD 11.6 billion, which will be later converted into a convertible bond with a conversion price of HKD 8.00. This is just like a father-son relationship. No matter how naughty the son is, how wrong the son has done, the father is always forgiving and will give unconditional love to the child.

Or maybe it is a question of face. Nothing should go wrong within the Chinese government. With Citic Group being a Chinese government investment arm, nothing should go wrong within the Citic enterprise. The government just wants to end this saga as soon as possible and move on. And hopefully investors will forget it very soon.

Next time, when people see a governmental or semi-governmental company failing and its share price drop, buy the stock as the company will eventually be bailed out by someone higher up and the share price will subsequently go back up!

November 14th, 2008 | Tags: 267, bailout, CITIC Pacific, convertible bonds, loan | Category: Companies | Comments (2)

I’m trying to find what exactly the FX “target redemption forward contracts” are, as the term was mentioned in Citic Pacific’s (267) profit warning back in late October. After googling the term, I couldn’t find much info. But according to the profit warning, they should not be too different from the accumulator structure that I talked about previously (http://www.hkfinancialnews.com/?p=89). If any reader knows what exactly this is or has a sample termsheet, please send it to me.

Instead, I’ve found a lot of entries on TARN (Target Redemption Notes), which is a totally different beast. TARN is another structured product, but then its downside is protected as it’s principal protected. It also provides a guarantee of a certain amount of coupon over a period of time (hence the name target redemption). For example, if the target is 20% and the tenor of the note is 6 years, the note guarantees that the note holder will have gotten accumulative coupons of 20% of the principal value by the end of the sixth year. It also has a knock out feature where once the target coupon amount has reached, the note will be redeemed immediately at 100%. In the example, if the noteholder receives 8% in the first year, 9% in the second year, and the theoretical coupon rate in third year is 5%, then the noteholder will only receive a 3% coupon since the max coupon allowed is 20%. The amount of coupon is usually linked to the performance of a currency pair or a stock above or below a given strike on a series of fixing dates.

If Citic Pacific bought this type of TARNs instead of the FX accumulators, they would have suffered a much smaller loss!

November 11th, 2008 | Tags: 267, CITIC Pacific, Target Redemption Forward Contracts, Target Redemption Notes, TARN | Category: Companies | Comments (1)

CITIC Pacific dropped another 25% today to close at $4.91. Today’s newspapers seem to put the blame of the forex exchange option losses on the chairman’s daughter, Frances Yung. I’m not sure what good it can make by putting the blame on the chairman’s daughter. The damage has already done to the company and shareholders have suffered already. There is no point putting the blame on someone–and the chairman’s daughter is probably a very easy target because the media just like the sensational idea of an out-of-control chairman’s girl bringing down the company.

David Webb continues to blast CITIC Pacific by issuing another post (http://www.webb-site.com/articles/citicbomb2.htm). And both SFC and HKEx are now investigating the company and the credit agencies are in the process of downgrading the company (I always wonder why they always choose the reactive, rather than proactive, approach in dealing with scandals. What’s the use of credit agencies if they only downgrade companies only when the entire world already knows that something bad has happened to the company?

I really wonder if there will be more scandals on exotic option blowups from other HK-listed companies… Seriously, I’m not surprised if there are a few more saying that they suffer big losses because their directional bets on shares or foreign currencies have gone awry.

October 23rd, 2008 | Tags: 267, CITIC Pacific, credit agencies, David Webb, frances yung, hkex, SFC | Category: Companies | Comments (1)