A fresh scandal could be brewing at Oriental Century, barely nine months after extensive fraud orchestrated by its former chairman and CEO Wang Yuean came to light. Now, sources in China claim that a subsidiary Oriental Century wants to sell holds an interest in the buildings and land occupied by its flagship school Oriental Pearl College, assets that Oriental Century shareholders were apparently not aware that it owned. That has raised questions about whether Oriental Century is getting full value for its education-related assets, which it is selling in order to turn itself into a listed shell and make a fresh start.
On Nov 20, Oriental Century said it will sell stakes in two of its subsidiaries for RMB100,000 (S$20,195) cash. One of those units, Oriental Dragon Management (ODM), owns a 32% stake in Dongguan Baisheng Investment Development (Baisheng Investment), which in turn owns the buildings and land used by Oriental Pearl College, says Lei Hua, who was appointed CEO of Oriental Century after Wang’s fall from grace. Oriental Century has made no mention of holding an interest in Baisheng Investment. And, it describes the two subsidiaries it is selling simply as providers of management services to Oriental Pearl College in Dongguan as well as a high school in Nanchang and a kindergarten in Humen. Moreover, the price at which it is selling the two units suggests that ODM holds assets of little value.
In fact, Baisheng Investment holds assets potentially worth a few hundred million renminbi, Wang tells The Edge Singapore, in a phone interview last week. Baisheng Investment, previously controlled by Wang and his partners, was the linchpin of Oriental Century’s profitability. It leased the premises of Oriental Pearl College to Oriental Century for a paltry RMB3.75 million a year, yet was responsible for much of the school’s liabilities. On the other hand, Oriental Century earned management fees from running the school and reported healthy earnings and swelling cash holdings in the two years that followed its listing in Singapore in 2006. In reality, Wang was secretly channelling money out of Oriental Century and falsifying its accounts. He told The Edge Singapore in July that the funds weren’t pocketed by him but used to meet obligations at Baisheng Investment.
After the fraud was uncovered, a special audit by PricewaterhouseCoopers found that Oriental Century had a bank balance of RMB1.78 million at end-2008, instead of the RMB234.4 million it had reported. To make amends, Wang offered to hand over control of Baisheng Investment to Oriental Century. Officials at Oriental Century initially demurred, fearing that Baisheng Investment may have significant liabilities they didn’t know about. However, sources tell The Edge Singapore that ODM, the China-based unit Oriental Century now wants to sell, actually took over Baisheng Investment from Wang on June 27.
Less than a month later, on July 21, ODM parted with a 68% stake in Baisheng Investment to a company called Dongguan Yueying Industrial Investment, under a joint-venture deal that saw Dongguan Yueying taking over Baisheng Investment’s debts and providing all the necessary funds for the running of Oriental Pearl College, sources say. Despite the scandal that engulfed Oriental Century, the school has continued to function, with some 2,200 students and 270 teachers and administrative staff. Meanwhile, ODM retained a 32% stake in Baisheng Investment, now unencumbered by any liabilities, according to sources.
“The 32% stake is very valuable because it does not carry any historical debt burden,” says Wang. As he sees it, the price at which Oriental Century is selling its stake in ODM is much too low. “It’s unfair to the shareholders.” The Edge Singapore was unsuccessful in getting any information from Oriental Century’s board about the stake in Baisheng Investment the company is said to own. Oriental Century’s lead independent director Lai Seng Kwoon’s only response to questions from The Edge Singapore was to “refer to our announcement on SGXNet”.
Baisheng deal done by Lei
Oriental Century’s CEO Lei was more forthcoming, providing some background on how the company acquired Baisheng Investment. Originally hired as chief investment officer, Lei had little time to find his feet after being elevated to the post of CEO. With the revelations of Wang’s fraud making the news, Oriental Century’s creditors were getting nervous and Lei feared that might eventually threaten the operations of its schools. “My responsibility was to stabilise the situation,” Lei says. “I had very little time.”
Lei says he decided to take up Wang’s offer of Baisheng Investment, knowing that it owned physical property assets that were crucial to the operation of Oriental Pearl College. The vehicle used for the deal was Oriental Century’s subsidiary, ODM, Lei says. “I did not pay [Wang] anything because this was not a sale transaction. It was compensation. We registered it at the Commerce Bureau.”
Lei then brought in Dongguan Yueying to help fortify Baisheng Investment’s balance sheet and ensure that Oriental Pearl College would have sufficient funds to keep it going. “We became involved with the school at the end of July,” says Zhong Zhijun, one of three individuals on the board of Oriental Pearl College who represent Dongguan Yueying. “Before we acquired the school, it had a cash-flow problem. Not anymore.” Zhong also confirms that Dongguan Yueying has a 68% interest in Baisheng Investment.
Lei says he told Oriental Century’s independent directors Lai and Eric Leow of ODM’s interest in Baisheng Investment when they visited Dongguan in August. “I feel they understood the action I took,” Lei says. “If I had not done what I did, the school would have gone under.” Lei adds that he kept a lookout for an announcement from Oriental Century on the acquisition of Baisheng Investment, but the company didn’t make one.
Instead, three months on, Oriental Century is now proposing to sell the subsidiary that Lei says still owns a 32% stake in Baisheng Investment, together with a stake in another unit, to an investment holding and trading company called Dongguan Xinganyu Investment for just RMB100,000, according to its Nov 20 announcement. It is unclear who is behind Dongguan Xinganyu Investment or if it is related in some way to Dongguan Yueying.
For its part, Oriental Century says the proposed sale of assets was negotiated at arm’s length and is in the best interest of the company’s shareholders. “Although the purchase consideration may not be significant, the successful divestment of our loss-making assets and liabilities will be pivotal to the possible continuation of Oriental Century as a listed entity,” says Lai in a statement announcing the deal. “With the completion of the divestment, we can offer Oriental Century for a reverse takeover or other value-add corporate actions, so as to return value to shareholders.”
Oriental Century is now preparing a circular to shareholders on the proposed deal, and its board is urging investors to support it when it is put to a vote shortly. “[It is] imperative that shareholders support this divestment as it is a crucial turning point for the Company to position itself as an attractive reverse-takeover choice,” Lai says, in the statement.
Wang outraged by sale
Meanwhile, Wang says he is outraged that the company is preparing to sell ODM without apparently considering the potential value of its 32% stake in Baisheng Investment. According to him, Baisheng Investment had some RMB500 million of assets when he handed it over to ODM. “If you take away the debts, the net assets should be worth RMB300 million,” he tells The Edge Singapore, in the phone interview. “This shows my sincerity to make up to shareholders. Whether it is sufficient compensation is another issue, [but] if they give it away like that, it’s as if I did not compensate them.” By his own estimates, the 32% stake in Baisheng Investment held by ODM “is worth at least RMB90 million”.
Will Wang, who still owns 25% of Oriental Century, support the proposed sale of its two subsidiaries when it is put to a shareholder vote? Or, will he attempt to block it? Will Wang make an appearance at the EGM to register his protest? When asked, he says his shares in Oriental Century have been pledged to the United Overseas Bank group, so it would be up to the bank to decide what to do.
The largest shareholder in Oriental Century is Raffles Education, with a 29.9% stake. Raffles Education began accumulating the stake in late 2006, while Oriental Century appeared to be generating decent earnings. Raffles Education wrote down the value of its stake in Oriental Century to zero earlier this year. Officials at Raffles Education didn’t respond to questions from The Edge Singapore on how the company might vote on Oriental Century’s proposed divestment of its two subsidiaries.
If what Lei and Wang are saying is true, the board of Oriental Century might have a lot of explaining to do at its upcoming EGM.
Leu Siew Ying is an associate editor at The Edge Singapore
This article appeared in Corporate page of The Edge Malaysia, Issue 784,Dec 7 – 13, 2009.