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This article first appeared in The Edge Malaysia Weekly on November 4, 2019 - November 10, 2019

CHINA-based edible oil producer XingHe Holdings Bhd, which has been listed on the ACE Market since 2014, looks set to take a different path from its Bursa Malaysia-listed peers. China-based companies listed on Bursa — also known as red chips or M-chips — have been suffering from bad publicity and poor investor perceptions, mainly due to weak corporate governance and dismal share price performance. Many red chips are cash-rich with low debt levels, but the authenticity of their cash pile has always been a lingering question. Many investors, unfortunately, have got their fingers burnt as most of these counters have fallen well below their initial public offering price.

But XingHe may be about to redeem itself. In an Oct 18 filing with Bursa, XingHe announced that managing director Ma Guo Liang, who is also a major shareholder, had resigned as a member of its remuneration committee with immediate effect.

The 46-year-old Chinese national has been gradually divesting his holdings in XingHe over the last four years. He has trimmed his stake in the company from 63.15% in February 2015 to 27.95% as at Sept 6 this year.

Given XingHe’s expanded share base, resulting from the conversion of its redeemable convertible notes (RCN), Ma’s equity interest in the company is estimated to have been diluted to about 21%.

According to sources, Ma is close to exiting XingHe as its substantial shareholder, as well as stepping down as managing director. It is learnt that his shares will be sold to a Malaysian, who is expected to take over his position when he leaves.

“The shares could be transacted as early as the middle of this month. Even if Ma remains as a shareholder of XingHe, his stake will no longer be significant,” a source tells The Edge.

Year to date, shares of XingHe have declined 9%, to close at 25.5 sen last Friday, for a market capitalisation of RM144.5 million.

Based on its closing price of 25.5 sen, Ma’s 21% equity interest, or 119.274 million XingHe shares, are worth about RM30 million.

However, it should be noted that Ma had offloaded two blocks of shares — 10.75 million shares on Sept 3 and 4.17 million shares on Sept 6 — at eight sen apiece, which represents a huge discount of 65% to its closing price of 23 sen on the two days. In other words, if eight sen is the exit price that Ma is eyeing, he could be willing to let go of his remaining shares in XingHe for about RM9.5 million.

Founded in 2002, XingHe claimed to be one of China’s top edible vegetable oil companies. Apart from peanut oil, it also manufactures peanut protein cake, a by-product. The company made its debut on Bursa Malaysia in April 2014 after completing a reverse takeover of Key West Global Telecommunications Bhd.

In September 2014, Ma reportedly said the group planned to build a second plant in China in the first half of 2015 to produce peanut protein powder. Estimated to cost RMB400 million, the proposed plant was part of the company’s plan to venture into the nutritional food industry.

Ma had also said that XingHe planned to set up a palm oil refinery in Malaysia with an annual capacity of 100,000 to 150,000 tonnes as it saw potential in the country becoming a hub for its business expansion in Southeast Asia. However, there have been no updates on these plans and it does not seem like they are going to materialise.

Nevertheless, XingHe is in the process of issuing RCN for a total value of RM120 million to raise funds for its diversification into aquaculture operations by acquiring a prawn farm in Tawau, Sabah, for RM100 million.

Advance Opportunities Fund, which is controlled by Tan Choon Wee — the CEO and director of Singapore-based Advance Capital Partners Asset Management Pvt Ltd — has agreed in principle to subscribe for the RCN.

Another source tells The Edge that XingHe could be looking to hive off its traditional edible oil business in Henan back to Ma as the new controlling shareholder intends to transform the company into a pure aquaculture player.

“In the next stage, I believe XingHe’s peanut oil business is likely to be taken back by Ma. The listed company, which will be given a new name, may focus on prawn farming,” says the source.

If XingHe is no longer a red-chip counter, will investors still be keen on it?

“If you ask me, this counter is totally off my radar screen at the moment. But if it is being turned into a Malaysian-owned company with operations here, then I might look into it,” says a corporate observer, adding that the change could be good news for minority shareholders.

The imminent exit of Ma and recent business diversification into aquaculture operations look to be a way for XingHe to redeem itself in the eyes of the investing community. But will it succeed?

 

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