XPD (ASX) Ann: Commentary on 2016 full year results

Originally posted by BSJ ↑

My point is that the capital movement restrictions put in place by the Chinese government have a major impact on the possibility of XPDs cash coming back to Australia to be distributed to shareholders.

If XPD wasn't able to effect a share buyback because of these restrictions, the probability that the proceeds of a liquidation of XPD would come back to ASX shareholders is very close to zero. And if that's the case, then the shareholder isn't really a partial owner of the business, and XPD.AX shares are fundamentally meaningless.

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Its a fact that the capital movement restrictions can stop capital from leaving but I'm inclined to think this is all about the cash economy and taxation.

Paying an Australian parent company management fees and expenses which are subject to tax in Australia isn't prohibited.

There are however tax implications. Chinese companies pay 25% tax , Australian companies pay 30%. Its therefore more tax effective to leave the money in China if thats where its needed to take advantage of growth opportunities.

Chinese companies are not restricted from paying their Australian parent companies dividends.

If the Chinese company pays the Australian company a dividend there is an additional 10% tax payable on that dividend (total tax becomes 32.5%) and the dividend in the Australian Companies hands has no franking credits attached. Again whilst the money is needed for growth in China its best to leave it there.

Once the dividend is out of china I don't know of any restrictions that are imposed on what the Australian Company uses the funds for.

If it pays it as a dividend Australian tax would be payable with no franking credits available, which is probably what everyone realised when the last dividend was paid and may well be the reason for the moratorium on dividends.

If XPD uses the dividend to buy back shares the shareholders would incur capital gains or losses.

It could of course use it grow assets in Australia and the rest of the world and generate Australian taxed profits which could be distributed as fully franked dividends.

The chinese have via the IPO got ownership of the assets out of the country. I guess when the growth prospects in china have been exhausted and its time to get the cash out the Australian shareholders who by their minute shareholding have made it possible will be along for the ride.

We might see our Chinese Subsidiary supplying a chain of very profitable XPD outlets across Australia and the rest of the World and be presently surprised by the franked dividend stream.

Its worth noting that Warren Buffet doesn't return anything to shareholders and probably never will.

When the cash is locked up in the company the shares can still be very valuable.