SAN DIEGO, Feb. 15, 2018 /PRNewswire/ -- The following is a letter issued by Brandes Investment Partners to shareholders of Weiqiao Textile Company Limited:
Re: EGM to approve and ratify the Past Fund Transactions by the Independent Shareholders | Very Inefficient Capital Structure
Dear Fellow Independent Shareholders,
Brandes Investment Partners, L.P. ("Brandes"), on behalf of its investment advisory clients, is a significant investor in Weiqiao Textile Company Limited (the "Company"). Our clients currently hold 16.51% of the total issued H shares equivalent to 5.72% as to the total issued shares of the Company (domestic and H shares). As long-term oriented investors, our interest resides in increasing the per share intrinsic value of the Company in a sustainable manner and for the benefit of all shareholders.
References are made to (i) the announcements of the Company dated 10 November 2017, 29 December 2017 and 12 February 2018; and (ii) the circular of the Company dated 15 January 2018.
We want to make you aware of our recent efforts to engage with the Company to address what we consider are significant lapses in corporate governance at the Company, as evidenced by the very substantial Past Fund Transactions between the Company and Shandong Weiqiao Chuangye Group Company Limited (the "Parent Company") for which the Company failed to comply with the relevant requirements under the Listing Rules, and the very inefficient capital structure that, in our view, has and may continue to cause economic harm to the independent shareholders of the Company (being shareholders of the Company other than the Parent Company, Mr. Zhang Shiping (non-executive director of the Company) and Ms. Zhang Hongxia (chairman and executive director of the Company)) (the "Independent Shareholders"). We have reluctantly decided to release this letter as a result of what we perceive as a lack of genuine interest by the Company to pursue significant value enhancing actions for the shareholders as a whole.
Past Fund Transactions
We believe the Past Fund Transactions serve no commercial purpose, and from our perspective, effectively make the Company a financial intermediary and important conduit for the Parent Company to access liquidity. Since the Parent Company is not listed and does not have publicly available financial statements, Independent Shareholders are unable to evaluate its creditworthiness. Moreover, we believe these connected fund transactions represent a clear conflict of interest as demonstrated by the fact that the Company fixed the interest rate with reference to one-year lending rates without including a lending spread and to the best of our knowledge without requiring any collateral from the Parent Company in the event of default.
From the perspective of the Independent Shareholders, the Past Fund Transactions did not result in reasonable value for the Company, and given the materiality of the funds transferred, which in 2016 amounted to approximately RMB8.6 billion which is in excess of the Company's market capitalization, the Past Fund Transactions unnecessarily exposed the Independent Shareholders to a possible very substantial loss of capital.
While we support the Company's withdrawal of the proposal that would continue to allow such practice, we believe that if we ratify the Past Fund Transactions as the Company has requested, we would have left the root problem unresolved, which in our view is the Company's very inefficient capital structure.
Very Inefficient Capital Structure
We strongly disagree with the Company's argument that the Past Fund Transactions represented an efficient use of the surplus cash resources, a situation that in our view is not as temporary as it claims. We find the Company's position unnecessarily conservative considering it had RMB14.3 billion of cash and RMB9.7 billion of debt putting it at a RMB4.6 billion net cash position as of 30 June 2017. To put these figures in context, the cash balance is equivalent to approximately 80% of shareholders' equity and the net cash position exceeds the Company's total market capitalization (including domestic and H shares). This situation is highly detrimental to the economic interests of the Independent Shareholders, and in fact, it has caused and may continue to cause economic damage for the following reasons:
While we acknowledge the Company's decision to repay the corporate bonds as they expire and to potentially make a small increase to the payout ratio are steps in the right direction, we are extremely disappointed that the Company is not taking more meaningful steps to address the overcapitalized balance sheet including, as we previously communicated to the Company, the accelerated repayment of the bank borrowings and the distribution of a special dividend. As we explained to the Company, a payout ratio of less than 100% addresses the distribution of future profits only and does not resolve the issue of the excess capital already on the balance sheet, which is why we believe the most efficient utilization of the surplus cash resources is to distribute a special dividend in the amount of RMB4 billion or approximately HKD4.13 per share. The result would be a more efficient capital structure that creates significant value for the Parent Company and the Independent Shareholders who would both receive a substantial unrestricted cash distribution in proportion to and without any dilutive effect on their existing shareholdings.
We are concerned that approving the Past Fund Transactions sets a very dangerous precedent bearing in mind that the very inefficient capital structure may continue to expose the Company to other financial arrangements that may not be in the best interests of the shareholders as a whole and may result in the suboptimal use or even permanent loss of capital for shareholders. Such concern may continue to depress the valuation multiples that the market is willing to assign to the Company until such time when the situation is addressed through concrete meaningful actions as previously outlined. Hence, we strongly believe that the Company should address its very inefficient capital structure as it asks the Independent Shareholders to approve and ratify the Past Fund Transactions.
We intend to vote against the resolution seeking approval and ratification of the Past Fund Transactions in order to send a strong and clear message to the Company that any financial arrangements that are not in the best interest of the shareholders as a whole will not be tolerated, and urge the Company to take immediate actions to rectify its very inefficient capital structure and regain the trust of its Independent Shareholders. We continue to see significant value in the Company's shares and our intent is to engage the Company in a constructive manner to help realize that value.
About Brandes Investment Partners, L.P.
Brandes Investment Partners, L.P., is a leading investment advisory firm, managing global equity and fixed-income assets for clients worldwide. Since the firm's inception in 1974, Brandes has consistently applied the value investing approach, pioneered by Benjamin Graham, to security selection and was among the first investment firms to invest globally using a value approach. The independently owned firm manages a variety of active investment strategies and applies its investment philosophy consistently in all market conditions. Headquartered in San Diego, Brandes and its related entities have offices in Milwaukee, Toronto, Dublin and Singapore.
Brandes Investment Partners, L.P.
11988 El Camino Real │ Suite 500 │ P.O. Box 919048 │ San Diego, CA 92191-9048
858.755.0239 │ 800.237.7119 │ Fax 858.755.0916
www.brandes.com │ info@brandes.com
Stephanie Dressler
stephanie@dlpr.com
949-269-2535
Shaina Lamb
shaina@dlpr.com
646-808-3731
