29th August 2019 – (Hong Kong) In our previous article dated 14th August and another article dated 29th August respectively, we scrutinised the donations to the controversial 612 Humanitarian Relief Fund which was set ups to provide legal expenditure, medical expenses, psychological counselling and other related assistance for protesters during anti-extradition rallies. The Fund has raised an impressive amount of HK$74 million to-date. As Jimmy Lai has allegedly funded Occupy Central in the past, we are intrigued to find out more if he did fund the anti-extradition frontline protesters this time even if he has vehemently denied.

Apple Daily, labelled by Chinese state media as a ‘poisonous apple’ published on its front page during a protest in August organised by the Civil Human Rights Front, ‘See You Today in Victoria Park.‘ Daily page views have doubled on days of street rallies, to an average 80 million, according to company data. As the number one local media in Hong Kong, there is no doubt that it can exert undue influence over its readers since it can be used a pro-democracy machinery.

In a Bloomberg article published yesterday, Jimmy claims that while he does donate to pro-democracy parties and politicians in Hong Kong’s legislature, he hasn’t given any money of his own to support the protesters. “Next media is supporting the movement,” he says, “that’s it.” So, may be he wasn’t lying after all as HK$300,000 (albeit small) was donated directly to the 612 Humanitarian Relief Fund. Apple Daily also announced that (Read HERE) HK$1 from each of the one-time fee HK$3 subscriber paid between 17th June and 1st September will be donated to the 612 Humanitarian Relief Fund. He is so supportive of the Fund that Joseph Zen, a close ally of him is made one of the trustees. As Apple Daily claimed over 1 million people have paid the HK$3 one-time charge, we can safely assume that another HK$700,000 or more was also donated to the Fund via undisclosed entities.

The more compelling question is did someone act as proxy/proxies for him sell Next Digital LTD shares when the share price reached its peak in June and were the share sales proceeds used to fund the movement?

More than 1 million people registered to pay a one-time fee of HK$3 each to keep access to the websites between 17th June and 1st September. After 2nd September, charges of HK$6.40 will begin. Source : Apple Daily.

The embattled Next Digital Ltd which has been losing money for years attempted to turnaround by charging Apple Daily’s online readers recently. More than 1 million people have registered by paying HK$3 each to keep access to the websites until the monthly charge of HK$6.40 begins on Sept. 2. Share price rocketed 132% in a two-week period in June after the company made an announcement that over 6 million people had registered for basic access. The stock price went up 59% since the protests began in early June despite a drop of 4% in the Hang Seng index as market sentiment was affected by the protests. Meanwhile, Next Digital Ltd issued a standard announcement after The Stock Exchange of Hong Kong queried its UNUSUAL PRICE AND TRADING VOLUME MOVEMENTS. This query is normally issued by the Stock Exchange if a stock price moves up too quickly.

An overview of the financial health of Next Digital Ltd and the new paywall business model

The group recorded a net loss of HK$338 million in the financial year of 2018-2019. The total accumulated loss in 4 years has reached over HK$1.5 billion while the group has suffered a whopping loss of HK$2.3 billion in the last 9 years. 60% of the company’s revenue is generated from Hong Kong while 35% is from Taiwan.

Next Digital’s gearing ratio was more than doubled to 18.7 per cent in 2017 from 9.1 per cent 3 years ago. It has outstanding bank loans of HK$485 million in 2018 that must be repaid over the next four years. In 2018, the company disposed of a property in Taiwan worth HK$435 million and drawn one-fifth of a HK$500 million line of credit from Jimmy Lai, who has other business interests, including 14 hotels in Canada.

Investor David Webb, Next Digital’s second-largest shareholder as of last year, questioned openly whether people will pay for news where information is available free online. He sold Next Digital shares last year after they were diluted by an employee stock incentive program. One week after the subscription fee was introduced, fewer than 3,000 people canceled rather than be charged the monthly rate.

We are sceptical as to how Royston Chow, Next Digital’s chief financial officer derived at the potential revenue of HK$500 million a year via subscriptions and so we did our own calculations below.

Between 17th June and 1st September, a one-time fee of HK$3 was charged. According to Apple Daily, more than 1 million from the 6 million (claimed by Jimmy Lai) who have registered for basic access have paid for the one time fee. According to Comscore, the Hong Kong website has only 5.1m non-recurrent independent users while the Taiwanese website has 11.9m non-recurrent independent users.

As stated earlier, HK$1 from each of the one time fee HK$3 subscriber will be donated to the 612 Humanitarian Relief Fund. Hence, only HK$2 left will be used to contribute to its revenue. Assuming that 1m readers have paid HK$3 each, the total revenue generated would be HK$2m.

On 2nd September, a monthly charge of HK$6.40 will commence officially. This is a big stress test for Apple Daily since the company is relying on subscribers to switch from a one-time HK$3 fee to a monthly fee of HK$6.40. If all 1 million subscribers were to convert to this monthly plan, it would generate monthly recurring revenue of HK$6.4m and an annual revenue of HK$76.8m.

The distressed group has outstanding bank loans of HK$485 million in 2018 that must be repaid over the next four years. Even in the best case scenario where 1 million subscribers are willing to pay HK$6.40 monthly, the revenue generated is hardly sufficient to repay its loans. We have to agree with David Webb that the total number of subscribers will be less than a million as most people will rather browse online news for free.

Any rational investor would not have jumped in hastily to buy Next Digital Ltd shares given the poor financial state of the company and its farfetched ambition to generate revenue solely based on subscriptions. Market sentiment was also weak in June 2019 due to anti-extradition protests and the US-China trade dispute.

The abnormal price surge in June

According to Next Digital Ltd’s annual report in 2018/19, Jimmy Lai owns 71.26% of the company shares. The company is therefore highly illiquid as the public float is less than 30%. This explains why the stock only had an average daily trading volume of less than 1 million throughout 2019 with an average price of HK$0.19 to HK$0.21 before June.

Next Digital Ltd (282: HK) Source : Bloomberg

In the absence of significant public float, the stock price of Next Digital Ltd (282:HK) (Previously known as Next Media) somehow spiked from 6th June this year, trading volume increased from over 2,940,000 on 5th June to 117,987,304 on 17th June. The stock price stabilised at around HK$0.26 recently (Closing price on last Friday) (Source : Bloomberg). The massive buying interest in the stock is questionable as the subscription model does not seem to alleviate the financial woes of the company and its shares are tightly held by Jimmy Lai. We are unsure if the announcement of the new paywall model was timed to coincide with the run-up in price intentionally.

As mentioned in our previous article, it seems likely that the share price reached a high of HK$0.38 before some large blocks of shares were offloaded to undisclosed buyer(s) either in open market or off market. As we could not find any records of off-market transactions, one can safely assume that they were done in open market as no one would buy the stock at this price unless the buyers were ‘friendly’. Moreover, open market transactions usually leave no trace behind. If we assume 200,000,000 shares have changed hands and sold at an average price of HK$0.30 to HK$0.32 cents, the seller would have raised at least HK$60 million in cash. In order to buy back the shares in near future to avoid any change in shareholding, the original seller(s) only needs to wait till the share price has receded to the average low and he/they can then make the purchase again.

It is easy for the ‘friendly buyers’ to use some proxy accounts to hide behind securities firm such as China Galaxy and Citic Securities to buy Next Digital Ltd shares during its peak without any trace as all transactions would be completely legit on a willing buyer – willing seller basis.

We mentioned in an article before that if we analyse the historical involvement of National Endowment for Democracy (NED) in Occupy Central and the sequence of events that took place since March 2019, it is likely that the Americans may be potentially funding the current civil unrest. Both Jimmy Lai of Next Digital and Martin Lee, chairman of the United Democrats of Hong Kong  are closely knit to the foundation.

Next Digital Ltd has suffered an accumulated loss of HK$2.3 billion in the last 9 years but it remains active in business. Despite an unconvincing paywall business model, the illiquid share price surged in June to everyone’s surprise. During a lunch at Jimmy Lai’s home, he talked to Bloomberg reporters about his meeting with the U.S. Secretary of State Mike Pompeo in July. Pompeo asked him what the U.S. could do to help. “Pray for us,” Lai responded with his eyes tearing up. It’s startling as to why the owner of a distressed media empire would fly all the way to meet US senior officials only to ask for prayers.