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The Li family: creating and diverting wealth

SCMP July 15, 2002

Can one ever be rich enough? The question urgently needs to be asked not just in the wake of the various scandals in the US - Enron, World Com etc. In those cases, greed may have been on such a scale that brushed aside not only ethics but the criminal law. Beyond those instances of possible criminality lies a culture of believing that to get rich is glorious, without much regard to the methods used.

For some, the habits of wealth accumulation become so ingrained that maximisation of personal wealth remains a dominating goal long after the addition of riches can have any significant meaning to the acquirer.

There are in practice two basic and very different ways of getting very rich. One can be that of C.Y. Tung, Bill Gates, Stan Shih or Sam Walton and provide new products or services that are so successful that personal wealth grows naturally with the business.

Or one can, whether through good market timing, clever trading or management control acquire a large share of a given pot of wealth. The last method has been rampant in the US through use of stock options and pumped up profits, using management control to acquire shares cheaply and selling them at prices inflated by dubious profits or outrageous promises.

In Hongkong, the favoured get-rich-quick schemes have been to take advantage of minority shareholders - and quietly chuckle at the spineless attitudes of over-paid, under-active regulators.

On the issue of wealth creation versus wealth diversion, I have to ask how much wealth is likely to be created by CK Life Sciences compared with how much will end up in the pocket of Li Ka-shing and the cash flow of his flagship Cheung Kong Holdings. Mr Li is once again taking advantage of the dreams of small investors by launching CK Life Sciences onto Hongkong's gullible public.

Ever friendly newspapers and the usual snake oil salesmen, the investment banks, have drooled over Mr Li's every word and insist that no one loses money by following the Li magic. Even two years after the bursting of the Nasdaq bubble, the public offering is claimed to be more than 100 times over-subscribed.

Let us look at the simple arithmetic. The offering of shares at $2 will raise some HK$2.6 bn , and provide a company which is just months old, has net assets 40 cents a share and makes no profit forecast with a market capitalisation of around HK$12 billion! According to the usual broker talk, that is likely to go to HK$18 bn or more once trading begins on July 16.

The company is just two years old. Mr Li (who will have 29% after the issue) and Cheung Kong (44%) acquired their shares for just 10 cents each. Although they are locked in for 12 months, they stand to be able to make colossal capital gains long before the company is profitable.

All of this might be understandable if CK Life Sciences were a cash starved start-up. But clearly Cheung Kong (and Mr Li) have the ability to fund it and bring it to the market when it is more mature. But no. The lure of a quick profit, capitalising on the Li name and the greed of investment banks desperate for some business with his group, has been too much.

In fact it is raising significantly more money than it will need between now and the end of 2004, even assuming that it does all the things contained in its prospectus. That raises the question of whether it really will try to become, as it claims, a world class player in bio-tech, making things from fertiliser to anti-AIDS drugs and sports drinks, or decide that it is easier to make money in less hyped industries.

That has certainly been the case with Tom.com which was launched at the peak of the dot.com bubble but has mainly invested in old line media companies. As with the GEM two other big listings, Tom.com and SunEvision, the GEM market is being exploited not by struggling entrepreneurs but by mega rich individuals jumping on the latest bandwagon.

Whatever happens to CK Life Sciences and its public shareholders, the Li family is sure to come out ahead of the rest. The formula is easy. Issue shares to yourself and friends for a few pennies each then, with maximum hype, launch them onto the public at several dollars each. Tom.com provided a particularly egregious example, receiving waivers of GEM rules on options issues and lock-up periods to make it even easier for the insiders to cash in quick.Tom.com shares are still above the issue price but a fraction of prices paid by the gullible public in the secondary market in the post IPO fever which allowed the insiders to cash out at huge profits.

Or remember PCCW? Almost everyone in Hongkong - including the government - has lost a bundle on PCCW shares. The ones who have not? Richard Li and a few other insiders. Before the hype machine was started, a billion PCCW shares were placed at HK$0.31 each. Within months, the nonsense about "rolling out broadband across Asia" had the usual gang of self-serving investment banks proclaiming the shares good value at HK$23.50! The price today: HK$1.75. Richard Li himself partly cashed out selling $3.6 billion worth when the shares were $15. Deputy chairman Francis Yuen made a handy 500% profit on share options granted a few months earlier. A full account of all the subsequent stock dealings of those who acquired shares and options at $0.31 would make interesting reading.

It would be nice to think that with all the cash it is raising CK Life Sciences really will become a force to be reckoned with in biotechnology. At present, the company has one product, a fertiliser, a handful of patents and other patents at the drafting stage. We would all cheer Mr Li if he helps create a new industry for Hongkong and creates value for the new shareholders. But the Li family's performance with PCCW and Tom.com justifies a high degree of cynicism.

Hongkong wonders why its economy is stuck in a rut. Perhaps Mr Tung might like to reflect on why his government worships at the feet of the wealth manipulators rather than wealth creators. Perhaps he should consider too the negative consequences for the economy of the people's savings being diverted from productive investment into stock market bubbles and ramps.

The Tung idea a "business-friendly" government is limit competition to protect the interests of the already mega rich. Those who remember how his own business career proved so disastrous for public shareholders in his family company may not be surprised. But it is still a disappointment. ends