釋放安寧價值
Unlocking value for ENM

Enough is enough: liquidate ENM now

Published: 9:30am, 13 Nov, 2023

Dear the directors of ENM Holdings Limited (ENM),

We, Argyle Street Management (ASM), are a fund manager based in Hong Kong.  The funds managed by us are long-term shareholders of ENM, and currently own approximately 1% shares in ENM.

Following the failure of the scheme of arrangement (Scheme) to privatize ENM by Solution Bridge Limited (an entity under the ChinaChem Group (ChinaChem)), we hope to express our disappointment and displeasure at the board of ENM.

At this juncture, we see no long-term future for ENM.  We propose that ENM shall be liquidated, and capital shall be returned to shareholders urgently.  Frankly, in our opinion, this is the only responsible act the board of ENM could enact given the circumstances.

The failed Scheme would have been a win-win solution for all stakeholders

In the scheme document, the independent board committee of ENM said that the Scheme was “fair and reasonable”, and recommended minority shareholders to vote in favour.

ASM agreed and did vote in favour.  The “cancellation price” (i.e. privatization share price) represented a massive premium of approximately 40-50% above pre-Scheme share prices.  The cancellation price was merely at 12% discount to ENM’s net asset value (NAV) in June 2023.  This is perhaps one of the most reasonable privatization attempts for small-cap real estate companies that we have seen in many years.  Many other privatization deals have been done successfully at much larger discount to NAV.  We applaud the team for being fair to all stakeholders in this regard.

Also consider the fact that ENM’s single largest asset is the redevelopment project in Tsuen Wan (i.e. Hilltop Country Club).  ENM has no recent track record in large-scale residential redevelopment, and limited ability to fund a multi-billion-dollar project on its own.  The logical developer of the project is a major property group such as ChinaChem.  The Scheme was indeed a sensible and win-win solution for both ChinaChem and the shareholders of ENM.  We were looking forward to seeing this project coming to fruition in the future helping alleviate the housing shortage of our city.

It is therefore beyond shocking that the Scheme failed.  We understand that other minority shareholders might have different views on the Scheme.  It is their prerogative to vote in favour or against.  But the fact that ASM, as a relatively large minority shareholder, was not contacted by ENM to articulate the details of the Scheme leads us to wonder whether the board performed its duties to help educate shareholders the merits of the Scheme.

Did ENM even try to engage with the shareholders?

As a relatively large minority shareholder of ENM, we are shocked that ENM (whose independent board committee recommend shareholders to vote in favour) has never contacted us formally to discuss the merits of the proposed Scheme, let alone trying to secure ASM’s votes, during the three-month period between the initial announcement of the Scheme and its failure.

ENM certainly knew that ASM was a shareholder.  In fact, ASM did a transaction with ENM in 2016, in which ASM bought shares in China Motor Bus (26 HK) from ENM.  Since then, ASM and ENM have maintained contact and discussed the businesses of ENM on many occasions.  ASM is probably one of the few institutional investors who has been interested in ENM over the years. 

In hindsight, given the low turnout at the court meeting of the Scheme, ASM’s vote (in favour) was quite significant, but was not enough to change the outcome.  Only 17% of the voting rights of eligible (i.e. “disinterested”) shareholders attended the EGM.  This turnout was much lower than what has been typical in other privatizations in Hong Kong.  If the board of ENM did not bother to engage with ASM properly, we start to wonder if they talked to other minority shareholders.   We certainly start to wonder whether the board even sincerely wished to complete the proposed Scheme.

We speculate that another scenario might be true:  the ENM board had so much (misguided) confidence that the Scheme would succeed, that they felt there was no need to talk to the shareholders.  If they believed that it was sufficient to merely upload to the HKEx website a 146-page-long jargon-filled scheme document and then expect the unwavering support of the minority (and mostly retail) shareholders, then the ENM board has serious governance, competence, and investor relations issues.  If this is true, then the arrogance of the ENM board and its lack of respect for minority shareholders are mind-boggling.

ENM’s strange portfolio of legacy assets has no synergies and results in depressed share price

ENM has a strange collection of mostly legacy assets that have no synergies with one another:

• Swank fashion retail stores
  • Swank is well known to be Nina Wang’s “toy” when she was alive
  • Retail format such as Swank is way past its prime and in any event, it is not clear to us that the board of ENM has the ability to manage a luxury retail business
  • Do not blame Covid-19:  the fashion segment of ENM suffered from full-year losses in all of the past ten financial years, with total segment losses of almost HK$300 million in that period (vs. current market capitalization of HK$ 554m)

• A portfolio of investment funds and discretionary accounts managed by various international managers (e.g. PIMCO, Morgan Stanley)
  • These account for almost half of ENM’s total assets in June 2023. 
  • If ENM shareholders want to invest in PIMCO or Morgan Stanley-managed funds, they can do so themselves.  Shareholders do not need to pay the board of ENM millions of HK$ per year and spend even more to maintain a listed company, in order for the board to play fund-of-fund manager.
  • ENM is not a fund manager.  ENM should have returned excess capital to shareholders instead of playing with shareholders’ money in investments that they have little expertise in

• Shares in China Motor Bus (CMB)
  • That is a real estate company in Hong Kong which has significant governance issues and no viable succession plan
  • ASM, which has been actively engaging with CMB over the years, is not aware of what ENM has done to optimize the value of this position

• Hilltop country club in Tsuen Wan, which is a residential redevelopment project
  • This is a critical asset from a value standpoint.  Presently, the asset is poorly managed (as the club’s guests who share the its swimming pool with wild monkeys could probably testify), which suffered from heavy losses even before Covid-19.  It would be a perfect solution monetizing it by selling the asset to ChinaChem
  • Financially, it is impossible for ENM to handle this redevelopment project with an estimated cost at over HK$6 billion (many times the market cap of ENM)
  • On its own, ENM would never be able to realize value from owning this asset

• Some strata units of an old industrial building in Kwai Chung, which has little strategic value

From our experience, ENM is precisely the type of listed company that almost always trade at large discount to NAV, to the detriment of all shareholders (including ChinaChem).  The market has spoken:  after the failure of the Scheme, ENM’s share price is now trading at half of its NAV per share.

Delay no more:  liquidate ENM

Looking at historical share price performance and the failure of the Scheme, we no longer have faith in the board of ENM.

To narrow the discount to NAV and stop the cash bleed, we propose that ENM shall liquidate all its assets, implement cost-saving measures and return capital to shareholders, by doing all of the following urgently:

• Redeem all of its investment funds or discretionary account that can be redeemed
• Replace the expensive board
• Sell all its listed investments (including China Motor Bus shares)
• Sell the redevelopment project in Tsuen Wan
• Sell the industrial building units
• Sell loss-making Swank to a strategic investor (or shut it down if that fails)
• Sell all other residual assets
• Distribute all disposal proceeds to shareholders and stop making new investments

Given the large and unnecessary costs of maintaining a listed company, there is no real reason for a company like ENM to remain listed.  It is only logical that ENM shall be delisted once liquidation is completed.

The ASM team has a long track record of liquidating listed companies, shutting down businesses and returning capital to shareholders.  If the ENM board is unable to do so, we are happy to appoint our representatives at the board the ENM, to facilitate the liquidation exercise.

Yours sincerely,

Kin Chan
Chief Investment Officer
Argyle Street Management