A number of Hong Kong companies have granted share options in exchange for the services of a Shenzhen public relation company, sparking debate about whether the payment method is appropriate.
HK Zhixin, a little-known Shenzhen-based PR firm, came under the spotlight in July after revelations that it was holding 17.5 million share options related to its client China Maple Leaf Educational. There are more than 10 public relations agencies in Hong Kong specialising in providing services to listed companies
Maple Leaf’s Hong Kong-listed shares had surged as much as 130 per cent this year, but fell sharply when its unique payment scheme came to light. As its share price reached its year high, Maple Leaf had a market capitalisation of nearly HK$12 billion.
According to a filing to the Hong Kong stock exchange, Maple Leaf granted 17.5 million options to Zhixin on June 8, 2015 at an exercise price of HK$4. Two-fifths of the options can be exercised if the company’s market capitalisation is no less than HK$8 billion for 15 consecutive trading days. The remaining options can become excisable when the market capitalisation is no less than HK$10 billion for 15 consecutive trading days. Maple Leaf’s market value was about HK$3.8 billion at the time the options were granted.
“The PR firm is behaving like a fund, as it collects fees based on share performance,” Hong Kong Institute of Investors chairman Ricky Tam said.
“They are not licensed for securities dealing activity,” he added.
If Zhixin was to sell the options at HK$8.57, or near Maple Leaf’s share price high for the year, it could gain HK$80 million, or HK$26.7 million per year for the three year service contract.
Regional public relations companies typically charge clients around HK$500,000 to HK$1 million a year.
Oscar Wang, head of Shanghai at Ryan Communication, said it was unusual to accept share options as payment.
At least three other Hong Kong companies have given Zhixin share options in exchange for services. These include Hong Kong-listed mainland firms Essex Bio-technology, BAIOO Family Interactive and Kingworld Medicines. As part of the deal, the options provided by BAIOO Family and Kingworld Medicines must be executed upon market capitalisation reaching certain scale.
Carl Yeung, chief financial officer at BAIOO, said the company granted options to Zhixin in the belief that it could positively affect its share price which he believes is seriously undervalued.
BAIOO would pay a monthly fee of HK$30,000 and grant options to subscribe for 10 million of its existing issued shares at the exercise price of HK$0.7, according to an exchange filing in April. The price represented a premium of 59 per cent to the closing price of HK$0.44 on the date of the agreement. 100 per cent options could be exercised if market capitalization were to exceed HK$3.7 billion.
Listed in April 2014 at HK$2.15 per share, BAIOO’s shares have been hovering around HK$0.37 to HK$0.4 in the past month with a market value about HK$1 billion.
“Zhixin’s main job is to create exposure to mainland investors and media aiming to boost the stock’s liquidity and price,” Yeung said. He said that providing the securities for payment did not breach any exchange rules.
Nevertheless, the markets reactively negatively to the revelations. Maple Leaf’s shares fell more than 30 per cent as news of the agreement circulated.
An investor meeting note obtained by the Post shows foreign equity funds raised concerns over the deal.
But Maple Leaf’s management emphasised that it did not grant the options, although it had filed the agreement to the local bourse.
Brett McGonegal, chairman at Capital Link International, said equity options for partners is a good way of aligning interests and provides an incentive for companies to help raise equity value through their contact and services.
However, he cautioned that it may also create a conflict of interest.
“It is also offering a chance for vendors to manipulate the public perception of the company in the hope to increase the value of their option, such as putting out false or misleading press releases,” he said.
Andrew Lam, Hong Kong-based director at accounting firm BDO said the practise was within the listing rules.
He added that it “will possibly encourage some grantees to focus on short term objectives such as profit or share price, at the expense of long term benefits of the company”.
Zhixin was contacted by the Post but did not respond to queries by press time.
Tam said the public relations company should disclose that they stand to benefit from performance gains in their clients shares from any marketing events.