Kenfair: still stuck in the mines

After more than 18 months of suspension, shares of Hong Kong-listed Sino Resources Group quietly began trading again the day before the start of the Chinese New Year holiday.

The company was formerly known as Kenfair and it was formerly focused on B2B exhibitions.

Since 2007, the company has been tangled up in a mess. At that time, Kenfair's owners decided it would be a good use of company funds to buy a coal mine in China. Unsurprisingly, it all went wrong.

Since then, Kenfair's management and owners have been distracted by problem after problem - all stemming from the failed coal mine acquisition. On Wednesday, Kenfair used the time-honoured approach of slipping some bad news into the market just before a holiday. Kenfair (we will stick to referring to the company as Kenfair instead of Sino Resources) released a 23-page announcement to the Hong Kong Stock Exchange. Buried amongst the legal language, there were plenty of low-lights:

• Kenfair is still pursuing through the courts Mr. Richael (no, that is not a typo) Hung over the cancellation of the coal mine sales agreement and trying to force Mr. Hung to return the shares he now holds in Sino Resources which stands at 25% of outstanding shares.

• Their day in court is not expected until mid-2012.

• The police in Heilongjiang province now maintain that the company seal used by Mr. Hung on the coal mine sales agreement was forged. (It seems fairly predictable that a Hong Kong-based exhibition company with no coal mining experience would get itself into trouble trying to buy a mine in the Chinese hinterland.)

• There is a byzantine collection of legal actions by multiple parties in all related in some manner to the coal mine fiasco.
  

• In spite of itself, Kenfair's Exhibition Group recorded revenues of HK$87.4 million in the year ended 31 March 2010. Management is predicting revenues of approximately HK$80 million for the year ended 31 March 2011.

• Net profit in the seven month period of 1 April 2010 to 31 October was HK$15 million - up from HK$9.7 million recorded in the same period in 2009. (This would be a great little exhibition business if someone at Sino Resources was actually interested in that business.)
  

• The company will continue it organise its three key exhibitions: Mega Show Part 1 and Part 2 in Hong Kong and the Asia Expo in London.

• Kenfair's role in all other exhibitions, including the Ningbo International Sourcing Expo have been terminated - and that is probably a good thing. The lion's share of the company's revenues and profits have always come through the Mega Shows.

• Incredibly, Kenfair is no longer the actual organiser of these three exhibitions. The exhibitions are organised by a former subsidiary called Group Idea Limited. Kenfair disposed of Group Idea (for an unspecified reason and amount) in 2009. Kenfair is the manager of these three exhibitions under the terms of an agreement with the Group Idea. That agreement expires in 2012. Kenfair collects all revenues generated by these exhibitions and then pays Group Idea 20% of total revenues. Why a company would put itself in such a risky position is unclear, but it is likely that Group Idea is controlled by one of the owners of Kenfair. Otherwise, why sell off your core asset to someone who could walk away with it by simply not renewing the agreement in 2012?

• Kenfair now focuses on "sales and marketing as well as show management functions of exhibitions, instead of operational work." They claim to have just 19 permanent staff now of which only 7 are employed by the exhibition business. This is quite remarkable considering the company generates HK$80 million in exhibition revenues.
  

• The Board has "no intention to dispose of the exhibition business within 12 months after the resumption of trading (2 February 2011)." Good to know, but taking into account the fact that Sino Resources is now stacked with mining managers and that in November last year the company invested in a China-based natural gas drilling firm, I would say that their interest in B2B exhibitions is... limited.

• The natural gas acquisition is being financed by a placement of nearly 223 million shares at HK$0.35 - about a 20% discount to where the shares closed in June 2009 before the suspension. That should please Kenfair's long-suffering shareholders!
  

• Sino Resources unaudited liabilities are HK$325 million, but if the disputed liabilities are excluded, then operational liabilities would be just HK$62 million. So Mr. Richael Hung has currently stuck them for some HK$263 million (US$34 million). Well, good luck with that new natural gas venture, gentlemen. I guess you are hoping second time lucky.

Note: US$1 = HK$7.78