Caixin
Jun 29, 2015 04:52 PM

Share Price Tumble Puts Tycoon Linked to Fallen Officials, Businessmen in Spotlight

(Beijing) – The share price tumble of a Hong Kong-listed movie special-effects company in early June has put the spotlight on a businessman who is believed to be linked to disgraced officials and businessmen, and to have built his fortune through a number of controversial deals.

After a 41.4 percent share price retreat on June 3, speculation mounted that executives at Digital Domain Holdings Ltd., a special effects producer for several Hollywood blockbusters, were being investigated, even though a company executive denied it.

Several sources close to the matter said that Che Feng, who owns a majority stake in Digital Domain, was detained by investigators on June 2 in Beijing. The sources said more than 10 people linked to him have also been detained, including his assistant, driver and other employees. Che has spent most of his time in Hong Kong over the past couple of years and was detained after making a trip to the mainland, they said.

Little public information about Che is available. According to documents from China Ping An Insurance Group Co., where Che served on the board of supervisors from 2006 to 2009, he was born in 1970 and had property businesses in Hainan Province and Shanghai. He also served as the chairman of Beijing Worthope Sathen Network Technology Co. Ltd. and as executive director of the Center for Chinese and Global Affairs at Peking University.

A businessman familiar with Che who declined to be named said he was born in a military family in the eastern province of Anhui.

"Che's early property business in Hainan was not big," the businessman said. "He then moved to Shanghai in 1995 to do businesses related to Macau."

According to people with knowledge of the matter and transaction documents, Che profited handsomely from a deal in 2002 in which he purchased stakes in Ping An Insurance and Haitong Securities through a Tianjin businessman named Liu Zhiyuan. The two companies' listings brought Che net profits of 6 billion yuan and 2 billion yuan.

The deals prompted speculation that Che used his family connections to profit. Che is the son-in-law of a former central bank governor.

A source close to the matter said after Che was detained that Liu had also become the subject of a probe.

Several sources said the inquiry into Che was triggered by an investigation into Ma Jian, a former vice minister of state security, and Guo Wengui, a property tycoon who controls Beijing Pangu Investment Co. and was a stakeholder in Digital Domain. Ma was detained in January by the Communist Party's graft buster. Guo is overseas.

Che is also suspected of involvement in money laundering, said people with knowledge of the situation.

Fortune Building

Che has told his friends that his first fortune came from selling jeans in Hainan before getting married, people close to him said. He later worked the property market in the island province until 1995, when the housing market there collapsed.

He then moved to Shanghai and developed two residential projects in 1990s. One source said the projects did not go well and Che had financial problems. The projects were sold to the Shanghai branch of the Industrial and Commercial Bank of China, the person said.

In 2000, Che registered Beijing Worthope Sathenas a company. Its website says the firm offers network services and technology support to long-distance medical services and training in cooperation with the former Ministry of Health and the Aviation Industry Corp. of China.

However, Che's business focus remained on the property sector. In 2002, he acquired a property subsidiary of the Thai conglomerate Charoen Pokphand Group and its rights to a parcel of land in the Lujiazui District of Shanghai for US$ 36 million. The plot was developed into an office building in cooperation with Hopson Development Holdings Ltd. Before it was completed, the project was sold to a company called Pacific Delta Investments Ltd., and Che profited US$ 150 million from the deal.

Two other deals occurred in 2002 that were key to Che building his fortune. In October that year, the insurance regulator approved a structuring plan for Ping An Insurance. Under the plan, Ping An's two largest state shareholders – China Merchants Group and China Ocean Shipping Company (COSCO) – both exited the company by selling their stakes of 17.09 percent and 11.1 percent.

About 66 million of Ping An's shares held by COSCO were sold to Zhongtou Chuangye Investment Co., controlled by Liu Zhiyuan. A source close to the deal said the price for Zhongtou was 5.1 yuan per share, about one-fourth of the price offered to other buyers.

Company registration documents show that in December 2002, Zhongtou's ownership structure underwent a change that saw four Shenzhen-based companies all owned by Che become Zhongtou's shareholders.

Several sources close to the matter said Liu was a close associate of Che. A person close to COSCO told Caixin that negotiations on the share sale to Zhongtou were led by Che.

In 2003, Liu was sentenced to 18 months in prison for bribery, and in May 2005, he was jailed for three years for stock manipulation. Zhongtou was renamed Dinghe Venture Capital in November 2003, and it became a major investment vehicle for Che in the following years.

Ping An launched a public offering in Hong Kong in June 2004, and Dinghe became the company's 14th largest shareholder. A source close to Che said that as of June 2009, he had sold all of his Ping An shares, making more than 6 billion yuan in net profit.

In 2002, Zhongtou acquired 500 million of Haitong Securities' shares for 1 yuan each. Haitong launched a backdoor listing in Shanghai in July 2007, and the stake controlled by Dinghe was later converted to 347 million tradable Haitong shares. By the end of 2010, Dinghe sold all of the Haitong shares, which were trading at more than 30 yuan each at that time. It pocketed more than 2 billion yuan.

Several sources from banks and Dinghe's business partners said Liu had purchased Haitong shares on behalf of Che.

Heading to HK

After the Ping An and Haitong deals, Che's focus switched to private equity and publicly traded stocks in Hong Kong. Hong Kong business registry information show he controls five companies, including the British Virgin Islands-registered Ever Union Capital Ltd. The latter controls at least four Hong Kong-listed companies, including Digital Domain.

The predecessor of Digital Domain was Sun Innovation Holdings Ltd., a shell company listed in Hong Kong and acquired by Fortune Source International and Wise Sun in 2009.

Company registration documents show that Fortune Source International's owner, Zhang Xiaoqun, and Wise Sun's owner, Zhou Jian, were both managers at Shenzhen Xince Investment Co., which is controlled by Che.

Sun Innovation renamed itself Digital Domain in 2013 after it acquired the assets of what had been Digital Domain Media Group Inc., a special effects company co-founded by Titanic and Avatar director James Cameron. Digital Domain went bankrupt in 2012 and was sold to the private Chinese filmmaker Beijing Galloping Horse Film & TV Production Co. and Indian film companies in late 2012 at US$ 30.2 million.

Galloping Horse held 70 percent of Digital Domain after the acquisition and sold the stake to Sun Innovation months later. A company executive said at the time that the funds for the purchase came from private equity investors. Several sources said most of the money came from Che.

According to Digital Domain's 2014 financial report, by the end of that year, Che held 4.8 billion convertible securities in Digital Domain. They can be converted into company shares at HK$ 0.04 each. The company was closed at HK$ 0.59 on June 24.

The ties between Che and Guo Wengui can be traced back in 2012 when Guo became a shareholder of Sun Innovation. Documents from the Hong Kong stock exchange show Guo purchased 8.6 percent of the company for HK$ 0.083 per share from Che's brother, Che Tao, in September 2012. Guo sold all his stock on January 16 at HK$ 0.18 per share, profiting about HK$ 80 million.

People with knowledge of the situation said Guo and Che remain close. Che once lent 600 million yuan to Guo to help him get through a tough period and this cemented their relationship

(Rewritten by Han Wei)

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