29 Dec 2008 17:00
China Growth Opportunities Limited
("China Growth" or "the Company")
Circular Issued Rejecting EGM Requisition Proposals
Further to the announcement issued on 9 December 2008, the Board of China Growth announces that a Circular is today being sent to shareholders convening an Extraordinary General Meeting of the Company to consider the resolutions proposed by Lynchwood Nominees Limited (in its capacity as nominee to, and on the instruction of Mr Rhys Davies and Mr Brett Miller).
The Board has unanimously recommended that shareholders should reject all the Proposals and vote against all the resolutions which are to be proposed at the EGM.
The Board is committed to a strategy of actively realising meaningful value from investments and returning proceeds to Shareholders in order to help to reduce the gap between the Company's asset value and its current share price.
The Requisitionists' Proposals would, the Board believes, require the Company to sell its investments precisely at the point where they are likely to be at their lowest value; prior to the expected pick-up in 2010 being reflected in their valuation.
The Board's view is that the removal of the majority of Directors is contrary to the best interests of Shareholders as a whole and is motivated entirely by the ambitions of the Requisitionists, even though they only hold 10.2% of the issued share capital, to gain undue influence over the Company and embark on a liquidation plan that your Board believes would not provide the best potential generation of value for all Shareholders.
The Requisitionists are proposing to remove Victor Ng from the Company's Board. This demonstrates their limited understanding of what is required to manage the investment portfolio. Given that Victor Ng is the only member of the Board who speaks Chinese, and the only member based in Mainland China, the relationships with most of the portfolio companies are through him. Thus he is regarded by the Board as a key asset of the Company.
In essence, the Board believes that the Proposals are that the Company becomes a "short term" realisation vehicle with only four directors, two being the Requisitionists and the other two being Simon Littlewood (one of the Executive Directors of the Company) and Richard Battey (who was appointed as a Non-Executive Director of the Company on 17 September 2008).
However, Richard Battey has informed the Board that, in the event that Roy Leighton, Mark Huntley and Victor Ng are removed as Directors, he will resign immediately as a Director of the Company.
The full text of the letter being sent to Shareholders is set out in the Attachment to this announcement.
| A copy of the Circular will be made available at: www.chinagrowthopportunities.com or contact: | ||
| Simon Littlewood China Growth Opportunities Limited Tel: +852 3558 2051 | John West / Andrew Dunn Tavistock Communications Tel: +44 20 7920 3150 | Hugh Field Collins Stewart Europe Limited Tel: +44 20 7523 8000 |
The definitions used in this announcement are as set out in the Circular to Shareholders dated 29 December 2008.
Collins Stewart Europe Limited is acting for China Growth Opportunities Limited and no one else in connection with the Proposals and will not be responsible to any person other than China Growth Opportunities Limited for providing the protections afforded to clients of Collins Stewart Europe Limited or for providing advice in relation to the Proposals.
ATTACHMENT
Set out below is the text of the letter sent to Shareholders of China Growth Opportunities Limited on 29 December 2008:
"On 8 December 2008, the Company received a requisition from Lynchwood Nominees Limited (in its capacity as nominee to, and on the instruction of, Mr Rhys Davies and Mr Brett Miller), as a member of the Company representing at least 10% of the issued ordinary capital of the Company, requiring the Directors to convene an EGM to propose resolutions which would in effect:
amend the investment objective of the Company to be: "to manage the sale of the Company's investment portfolio and to maximise the return of invested capital to Shareholders during the period ending on 30 September 2010";
to remove Roy Leighton, Mark Huntley and Victor Ng as Directors; and
to appoint Rhys Davies and Brett Miller as Directors.
Each of the Resolutions is being proposed as an ordinary resolution, which requires a simple majority of those Shareholers voting to be passed. The Notice of EGM is set out at the end of this document.
In essence, the Proposals are that the Company becomes a "short term" realisation vehicle with only four directors, two being the Requisitionists and the other two being Simon Littlewood (one of the Executive Directors of the Company) and Richard Battey (who was appointed as a Non-Executive Director of the Company on 17 September 2008).
However, Richard Battey has informed the Board that, in the event that Roy Leighton, Mark Huntley and Victor Ng are removed as Directors, he will resign immediately as a Director of the Company.
We wish to explain to all Shareholders why we consider that you should reject all the Proposals and VOTE AGAINST ALL the Resolutions which are to be proposed at the EGM to be held on Friday 23 January 2009.
Background
Lynchwood is acting as nominee for and on behalf of Mr Rhys Davies and Mr Brett Miller. The Board understands that Mr Rhys Davies and Mr Brett Miller, through Damille Partners II (in which they each hold an equal beneficial partnership interest), acquired 5,000,000 Ordinary Shares (being 98% of their disclosed holding of 5,100,000 Ordinary Shares) very recently on 24 November 2008 at a price of 9.5p per Ordinary Share.
It is the Board's understanding that the Requisitionists are seeking to take de facto control of the Company's future so as to realise the investment portfolio in the period to 30 September 2010 and thereby seek to maximise, in the short term, the return on their investment. We do not believe that this strategy is viable in the current market conditions nor is it in the best interests of all Shareholders, especially those Shareholders who subscribed in the Placing.
Investment Strategy
The Company raised £50 million in the Placing in March 2006 at 100p per Ordinary Share (with Warrants attached on a 1 for 5 basis). The stated investment objective on which Shareholders subscribed was to "provide Shareholders with capital growth from investing in a portfolio of companies whose business operations are based in China". The Company was set up with an original life of seven years, of which over four years still remain. In line with the original investment objective, the Company has invested in a number of primarily private, small and medium sized, businesses which have potential to realise capital gains for the Company over the life of the Company. However, in today's climate the majority of them are illiquid.
In line with the strategy of realising value for Shareholders as and when opportunities arise, the Company has, to date generated some £5.3 million through the full realisation of three investments and the partial realisation of one other. The Company is currently fully invested in twelve investments.
The Board remains dedicated to delivering value to all Shareholders. The Board regularly reviews the Company's investment strategy, including very recently in the light of current global market conditions, and the Company's share price. The Company's investment strategy was recently endorsed by Shareholders at the Company's Annual General Meeting held on 27 October 2008.
In the Chairman's Statement in the 2008 Financial Statements released on 18 September 2008, the Chairman stated "It would be foolish at this stage to have a 'fire sale' of the Group's assets to prove that the business has significantly greater value than indicated by the current share price. Clearly however circumstances have changed since the flotation and I currently envisage more trade sale realisations than IPOs. We shall endeavour to achieve a few meaningful realisations or part-realisations in the next twelve months to demonstrate the quality of our portfolio". This has been demonstrated, with the sale of Asia Wind Limited taking place shortly after this statement, realising net cash of ₤2.0 million. Those sales proceeds should ensure that the Company has adequate working capital to continue without recourse to Shareholders and that there is a small surplus of cash to meet any short term or emergency funding needs of our investee companies. In the event that they are unable to raise any other funding, the Company risks significant dilution or a significant write-off of the investment if such cash were not invested.
As more fully described below, the Board is committed to a strategy of actively realising meaningful value from investments and returning proceeds to Shareholders in order to help to reduce the gap between the Company's asset value and its current share price.
The Investment Environment
As noted in the Half Yearly Results published on 28 November 2008, in common with many private equity and quoted market investors, the current financial and economic crisis has severely affected the fair and quoted value of the Company's investment portfolio. The Company suffered a net loss for the period, which resulted in a decrease in the Net Asset Value to £47.2 million at 30 September 2008, equal to 94.4 pence per Ordinary Share.
As highlighted in the Half Yearly Results, the macro-economic position in China has deteriorated further since 30 September. China recently announced the first decline in exports, a key generator of wealth for the economy, in six years. The World Bank and various other economists and analysts are predicting that China's GDP growth will drop from the 10-12% pa levels of the last few years to 6-8% pa, and that any upturn is now unlikely to occur until late 2009 or early 2010, assuming that the recession in the West can be contained and is fairly short lived, and that the Western financial system can be repaired and confidence restored. This also assumes that the measures introduced by the Chinese Government to switch from exports to domestic consumption will work, but it is very early days and, as such, there is little indication yet of the success of this strategy. China requires at least 8% pa growth to create the necessary jobs for its growing population and migrant workers. Many manufacturing businesses have closed down already, with more falling by the wayside by the day, and there are huge concerns as to the potential social unrest as unemployment spreads among the estimated 130 million migrant workers in China.
China has implemented a range of measures in response to the downturn, including a stimulus package, a relaxation of some of the restrictions imposed on bank lending, and agricultural reforms. As outlined in the Half Year Results, we believe that these measures will benefit our portfolio companies, which are weighted towards clean technology, water and non-export oriented sectors. However, there will be a time lag before the various measures begin to have a significant impact and value can be realised from the portfolio.
As outlined in the Half Year Results, the biggest issue facing a number of our investee companies has been the shortage of liquidity, caused by slowing growth and restrictions on bank lending. In common with many businesses, this has caused cash flow issues across a number of our investments in the past year. Given that no end is in sight to the liquidity crunch, and limited possibilities exist to raise follow on funding, the Executive Directors have been working very closely with the portfolio companies to ensure they conserve cash flow and cut overheads, and where they have existing debt, restructure their liabilities. Profits at many portfolio companies are expected to decline as they focus on cash conservation rather than profit growth to help to ensure that they can survive the turbulent period ahead. We anticipate profits for a number of our companies in 2008 to be lower than in 2007, with continued decline in profits in 2009 before picking up again in 2010.
Against this background, we believe that the Requisitionists' Proposals are unrealistic.
Proposal To Realise Investments By 30 September 2010
Your Board believes that this proposal would be a disaster for the majority of Shareholders, and would only be likely to benefit those who had recently acquired shares at the discounted market price at the expense of long term Shareholders.
The portfolio was put together on the basis that the Company would have a seven-year life. It consists primarily of presently illiquid private and thinly traded quoted companies in China. At the time that the Company was launched, there was significant interest in emerging markets from international investors, and multiple potential exit routes for the types of investments that the Company made. The position has changed considerably since then with a variety of external factors affecting private and quoted companies, particularly in the months of October and November.
Investors in the West have turned against emerging market stocks, and investors generally against small caps in a flight to perceived safety. There has been a collapse in levels of investment in both listed and private companies. As hedge funds, private equity funds and other investors look to deleverage and realise cash, distressed sellers and those who anticipate worsening conditions next year are flooding the market with assets, depressing the prices that can be realised in the short term and presenting a wealth of opportunities for buyers to cherry pick assets and drive hard bargains. The size of the overhang is illustrated by the press speculation that the book value of Lehman Brothers' Hong Kong unit alone was an estimated US$20 billion.
The table below highlights the significant falls in various equity indices during 2008:
| 3 months ended 31 March 2008 | 1 January 2008 to 26 December 2008 | |
| FTSE AIM All Share Index | -9% | -63% |
| FTSE China Index | -26% | -55% |
| Hang Seng Index | -18% | -49% |
| Shanghai Stock Exchange 180 A-Share Index | -31% | -66% |
| Shenzen Stock Exchange Constituent 100 Index | -24% | -62% |
The table above demonstrates the significant falls in value that have occurred since 31st March 2008, with an acceleration in the period immediately after we released the 2008 Financial Statements, which coincided with a significant worsening of the market and sentiment in the light of the collapse of Lehman Brothers. The stock market indices continued to decline from the end of September, though more recently in China the market appears to have stabilised, and in some cases picked up, so that it is now only marginally worse than at the end of September. The significant downturn in the market since the 2008 Annual Results were released was reflected in the fair values used in the Half Yearly Results.
In the immediate future, the most likely exit for the portfolio companies will be to Chinese buyers, both trade and financial, and this is where the Executive Directors are focusing their efforts. Here again conditions have worsened, with the perception that things will be cheaper in the future than now, a flood of distressed assets available, and participants leaving the market. A recent report from PricewaterhouseCoopers reported that mergers and acquisitions transactions in China in the period July to November 2008 had dropped 47% year on year, due to the global economic downturn, new labour laws and stock market conditions, and that domestic M&A deals would be delayed in the first half of 2009.
Asian buyers typically base their valuation on a multiple of historic profits, with the multiple adjusted dependent on future profits generation. As discussed above, the profits of many of our portfolio companies are likely to be heavily hit in 2008 and 2009 as they focus on cash conservation, and markets decline. If we are selling our investments in 2009, we believe the valuations will be based on the depressed results for 2008, compounded by a discount for the projected poor performance in 2009. Given the significant time required to conclude audits and negotiate the sale of investments in China, it is very likely that the Company would have to negotiate the sale of assets based on the 2008 results if the Company had to sell investments by September 2010.
It is the Board's strategy to dispose of investments in a sensible manner to realise value for Shareholders. Some investments are more saleble than others, will be less impacted by the short term negative factors, and are likely to bounce back quicker. Some investments, however, will be difficult to sell at any sensible value without a general pick-up in sentiment and markets. With a forced sale of all investments by 30 September 2010, the most likely scenario is that the Company will have disposed of some investments for a sensible value, but have a rump of investments which will effectively be given away relative to what could be obtained for them had the Company been able to continue for its original life span. The Proposals would force investments to be sold for whatever can be achieved in an extremely adverse market, ignoring what could be achieved with a sensible disposal strategy, thereby destroying significant value for Shareholders.
The Proposals would, we believe, require us to sell the Company's investments precisely at the point where they are likely to be at their lowest value; prior to the expected pick-up in 2010 being reflected in their valuation.
Board Structure
As detailed in the Admission Document, investing in Chinese private equity is high risk, and requires specialist management skills given China's undeveloped legal system, limited protection for minority shareholders, constantly changing regulations, a rapidly developing economy, and a business culture which is very different from the West and heavily dependent on personal relationships.
The significant role of the Executive Directors in realising value for Shareholders was pointed out to investors in the Risk Warning section of the Admission Document, which stated "The loss of the services of either of the Executive Directors could have a material adverse effect on the Company". With the Company now fully invested, that risk is significantly greater as the Company is dependent on the relationships of the Executive Directors to realise value from the portfolio.
The Requisitionists are proposing to remove Victor Ng from the Company's Board. This demonstrates their limited understanding of what is required to manage the investment portfolio. Given that Victor Ng is the only member of the Board who speaks Chinese, and the only member based in Mainland China, the relationships with most of the portfolio companies are through him. Thus, he is regarded by the Board as a key asset of the Company. In a hierarchical society such as China's, status, title and position are important. By removing him from his current position at the Company and effectively reducing him to the level of a consultant, Victor will be significantly reduced in his ability to work within China on behalf of the Company, as he will be perceived within China to have no status in the eyes of our investee companies and the potential investors and acquirors of the investee companies. To lose such relationships with the investee companies would have potentially devastating consequences for the Company.
For regulatory reasons it was necessary to set up the Company as a self managed fund, with the Executive Directors receiving support from the Investment Consultant. As the Investment Consultant is not a regulated entity, this structure needs to be maintained. The removal of Victor Ng from the Board may also jeopardize this.
Mark Huntley has been a Director of the Company since launch, so has a good understanding of the portfolio, and has made several trips to Asia, most recently in November when he met several of the investee companies. Based in Guernsey, he is in regular contact with the regulators of and auditors to the Company, and sits on the Company's Audit Committee. The Company benefits substantially from his many years of experience of being a director of similar companies and other investment vehicles, including other Asian investment funds, as well as a range of contacts.
Roy Leighton joined the Board as Chairman in July 2007. Roy has implemented a number of changes at the Company, including improving corporate governance and communication with Shareholders, as well as bringing contacts and insight from his over thirty years experience of working in China. Roy has spent much of his career in banking and capital markets, and his experience and contacts in the banking world will be especially useful when the credit markets eventually re-open.
Implications of Board Changes
If the Requisitionists' Proposals were to be approved, the Board can give no assurance that the regulatory consents would remain nor that the professional service providers would be willing to continue to act.
The Board has only received very limited information on the Requisitionists. Brief biographies of the proposed directors, extracted from report and accounts of publicly traded companies on which they serve as directors, are set out on page 10 of this document. The Board is concerned that the proposed directors themselves do not possess the specialist knowledge of the Chinese private equity market required to help manage the Company's business, or to achieve a satisfactory realisation of the Company's investment portfolio that would return a value acceptable to Shareholders as a whole.
The Board's view is that the removal of the majority of Directors is contrary to the best interests of Shareholders as a whole and is motivated entirely by the ambitions of the Requisitionists, even though they only hold 10.2% of the issued share capital, to gain undue influence over the Company and embark on a liquidation plan that your Board believes would not provide the best potential generation of value for all Shareholders.
Role of London Asia
Simon Littlewood and Victor Ng carry out the day-to-day investment management of the Company as Executive Directors. At the launch of the Company, both Simon Littlewood and Victor Ng were Directors of London Asia. However, during 2007 they both stepped down from the board of London Asia. Simon Littlewood and Victor Ng remain directors of the Investment Consultant, a subsidiary of London Asia.
Prior to receiving the EGM requisition, the Board had commenced the renegotiation and restructuring of the investment consultancy arrangements under which support services are provided to the Company. However, upon receipt of the EGM requisition, these discussions were suspended.
Action to be Taken
You will find set out at the end of this document a notice convening the EGM to be held at No1 Le Truchot, St Peter Port, Guernsey, GY1 3JX at 10.00 am on Friday 23 January 2009.
Shareholders are requested to complete and return the enclosed Form of Proxy for use at the EGM in accordance with the instructions printed thereon so as to arrive at the Company's Secretary, Elysium Fund Management Limited, No.1 Le Truchot, St Peter Port, Guernsey, GY1 3JX as soon as possible and in any event not later than 10.00 am on Wednesday 21 January 2009.
Completion of a Form of Proxy will not prevent you from attending the EGM and voting in person should you so wish.
Recommendation
Your Board considers that the Resolutions to be proposed at the EGM are NOT in the best interests of Shareholders as a whole.
Accordingly, your Board unanimously recommends Shareholders to VOTE AGAINST ALL the Resolutions to be proposed at the EGM, as they intend to do in respect of their own beneficial holdings in the Company amounting to, in aggregate, 390,000 Ordinary Shares, representing approximately 0.78 per cent. of the issued share capital of the Company.
Yours faithfully,
| Roy Leighton | Richard Battey |
| Chairman | Non-Executive Director" |
RELEVANT BIOGRAPHIES
| DIRECTORS OF THE COMPANY | |
| Robert Leighton (Non-Executive Chairman) | |
| Aged 67, Mr Leighton was appointed to the Board on 24 July 2007. He is a chartered accountant, qualifying with Ernst & Young, and a chartered banker. He has over 35 years' finance and investment experience. He was chairman of Nymex Europe Limited, the European arm of the derivatives exchange and was previously UK chairman for Calyon (formerly Credit Lyonnais) as well as chairman of their European advisory board. Having been active in the banking and finance sector in China for over thirty years, Mr Leighton has developed a significant expertise in oil, gas, metals and desalination sectors in Asia, the Middle East, Latin America and the former Soviet Union. He is a member of the Chancellor's High Level Group and also holds a number of non-executive posts, including being senior independent director of EDX (the European Derivatives Exchange), immediate past chairman of Financial Services Practitioner Panel and past chairman of the World Bank's International Task Force for Commodities. Mr Leighton is a director of the Dubai Mercantile Exchange and Chairman of the UKTI Financial Services Sector Advisory Board. | |
| Richard Battey (Non-Executive Director) | |
| Aged 56, Richard Battey was appointed to the Board on 17 September 2008. He is a chartered accountant who worked for the Schroders Group for 27 years, undertaking financial and management accounting roles in London over a period of 16 years and spending the latter 11 years in Guernsey helping to build Schroders' offshore private banking business. Since leaving Schroders, Mr Battey has worked as a consultant and was appointed Chief Financial Officer of a company involved in the exploration and production of oil and gas in Georgia and Kazakhstan. Mr Battey resigned from his role as Chief Financial Officer in order to establish a portfolio of non-executive directorships (including directorships of closed-ended investment funds and a private equity administrator). Mr Battey is a resident of Guernsey. | |
| Mark Huntley (Non-Executive Director) | |
| Aged 50, Mark Huntley was appointed to the Board on incorporation of the Company on 23 February 2006. He is an Associate of the Chartered Institute of Bankers. He is the managing director of Heritage International Fund Managers Limited, an independent fund administrator based in Guernsey focused on private equity, property, infrastructure and energy markets. He was formerly head of Business Development & Communications for the Baring Financial Services Group. Whilst at Barings, he was also Deputy Managing Director of Guernsey International Fund Managers Limited (Guernsey's largest fund administrators), until April 2000. He has 28 years' experience in trust and fiduciary services, private banking and offshore funds, particularly in the specialist and alternative fund sectors gained whilst at Barings over the last 19 years and, prior to that, with The First National Bank of Chicago. He is a founding director of The Channel Islands Stock Exchange ("CISX") and Chairman of the CISX Business Development Committee. He is a resident of Guernsey. | |
| Simon Littlewood (Executive Director) | |
| Aged 40, based in Hong Kong. After qualifying as a Chartered Accountant with Coopers & Lybrand, London (now PricewaterhouseCoopers) where he specialised in high growth companies, he joined the structured and corporate finance division of the HSBC Group in London. In 1995, he moved to BDO Stoy Hayward's corporate finance team, where he advised on AIM flotations, mergers and acquisitions and fund raisings. In 1996 he founded the London Asia Group, an international merchant bank. He has experience of working on transactions in the UK, Europe, North America, the Middle East, Greater China and South East Asia. Simon graduated in Law from Oxford University. | |
| Victor Ng (Executive Director) | |
| Aged 60, based in China and Singapore. A former principal with KPMG Singapore, he has funded, advised and launched several start-ups as well as later stage companies including several which were subsequently listed in Singapore, Malaysia, New York and London. These have included a number of Chinese companies. Victor was awarded the PBM (a public community service medal) for his social contributions by the President of the Republic of Singapore in 1992. | |
| PROPOSED DIRECTORS OF THE COMPANY |
| The biographies of the proposed Directors have been extracted from Report & Accounts of publicly traded companies on which they serve as directors: |
| Rhys C. Davies |
| Aged 40 and a resident of Switzerland, Mr Davies is a Chartered Financial Analyst and has nearly fifteen years of continuous investment management experience since joining Schroder Investment Management Limited in 1994. Since 1998, Mr Davies has served as managing director of Glendower Capital Limited and Glendower Partners Limited. He is also a non-executive Director of The Local Radio Company PLC, an AIM-listed company, and several private companies. Mr Davies holds degrees from the University of Wales and Imperial College of Science, Technology and Medicine. Source: Report and Financial Statements for the year ended 31 August 2008 of Osprey Smaller Companies Income Fund Limited |
| Brett Lance Miller |
| Brett Miller graduated from the University of the Witwatersrand (South Africa) with a Bachelors degree majoring in law and economics and additionally holds a law degree from the London School of Economics (after having relocated to the United Kingdom in 1988). He joined Nabarro Nathanson, a London-based law firm, in September 1993 where he practiced until December 1997. He has specialised in mergers and acquisitions and corporate finance in the energy and natural resources and smaller companies sectors. He is currently Managing Director and key shareholder of Ruegg & Co Limited, a London based corporate finance boutique which is active in bringing new issues to the AIM and PLUS markets. Source: Annual Report for the year ended 31 December 2007 of West China Cement Limited |
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