Li family: creating and diverting wealth
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
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
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
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
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