Tsui Wah has about 4,175 employees and boasts a market value of about 1.93 billion Hong Kong dollars (roughly $250 million), according to data from FactSet. In the fiscal year ending March 2016, the company reported HK$1.87 billion in revenue.
To avoid any conflict of interest, the company said in January it was calling a meeting for shareholders, and the building’s current owners would abstain from voting. Nevertheless, Noronha is resisting the transaction.
“There is no convincing reason for the money of minority shareholders to be spent on this, and it is imperative that they take a stand,” Noronha said in his letter, arguing that Hong Kong real estate prices are near all-time highs.
“It seems to us that an open market share buyback at these levels is a no-brainer where all shareholders participate, as opposed to this transaction that makes a lot of sense for the founders/related parties but is a terrible deal for minorities,” the letter said, concluding with a call to vote against the proposal.
When a company buys back stock, it lowers the supply of shares in the open market, thus increasing the value of shares still available.
A spokeswoman for Tsui Wah released this statement to CNBC in response to a summary of Noronha’s concerns:
We respect the views of different investors as different firms have different investment strategies. However, to the Group, we strongly believe the proposed acquisition will help ensure the smooth operation of our restaurant as well as enable us to benefit from the possible value appreciation of the property given the fast development of Grade A office buildings in the peripheral area in Kwun Tong. The acquisition price is determined based on the valuation and surveyor report prepared by an independent property valuer and surveyor. We are going to dispatch a circular soon, please refer to the independent reports for more details.
The spokeswoman clarified that the company expects to dispatch its circular — containing, in part, the particulars of the acquisition agreement together with a letter from an independent board committee, a letter from an independent financial adviser, a property valuation report, and a notice of the extraordinary general meeting to shareholders — on or about February 17.
Still, Noronha argued in his letter that the property acquisition would be “incorrect” on the management’s part as it risks “advantaging the related parties (current and former directors) over the rest of the owners of the business.”
Noster Capital is among the biggest minority shareholders of Tsui Wah, owning about 0.4 percent of the company, according to data reviewed by CNBC.
But, speaking with CNBC, Noronha said he has struggled to invest in Asian companies because of his concerns about corporate governance: “I’m getting sick of investing in Asia.”
In his letter, the fund manager addressed various claims made by Tsui Wah in support of the deal.
One of Tsui Wah’s arguments was that the company’s financial performance would benefit from ownership of the property. Noronha said this claim was not satisfactory as the rental expense savings and potential rental income will only be offset by the depreciation expense it would incur.
Noronha dismissed another claim of the company’s that it may benefit from the future appreciation of the property’s value, because “minority shareholders bought shares in Tsui Wah to benefit from the growth of its restaurant business” and not from speculation of Hong Kong property values.
All told, Noronha suggested that the company’s proposed action would actually hurt the corporate image as it appears that the management “is willing to mistreat the minority shareholders.”
Francis Lun, CEO of GEO Securities and long-time Hong Kong markets commentator, told CNBC that the property valuation “is suspect.”
Tsui Wah’s money, Lun said, should be used for “expanding the business rather than property speculation.”
Ronald Wan, chief executive of investments for Hong Kong at financial services provider Partners Capital International, told CNBC that he agreed “the valuation and the timing of the transaction cannot be justified” and that Hong Kong’s real estate market is expected to see an adjustment in coming years.
“This sort of connected transaction normally will be treated by the market with skepticism,” Wan said.
Noronha recommended in his letter that Tsui Wah make use of the HK$255 million to buy back shares in the open market — a move that could benefit all shareholders.
He added the share buyback also makes sense because Tsui Wah stock stands at HK$1.36 per share, down 75 percent from its all-time high and at a 40 percent discount from 2012 when it made its trading debut.