Thursday, 27 February 2014

Eratat: another S-chip bites the dust (2)

I blogged before about Eratat, one of the so called S-chips listed on the SGX.

The company made a new announcement, some snippets:

Mr Lin had produced online bank statements, the latest of which showed that the Company’s principal operating subsidiary Fujian Haimingwei Shoes Co., Ltd (“HMW”) had unencumbered cash balance of approximately RMB646 million (“HMW Cash Balance”) as at 24 January 2014 in its bank account maintained with the Agricultural Bank of China (“ABC Bank”), Jinjiang Chendai Branch (“24 January Statement”).

.... The above appeared to be consistent with an earlier document given by ABC Bank (“ABC Confirmation”), which showed that there was approximately RMB577 million of unencumbered cash balance in HMW bank account at ABC Bank as at 31 December 2013. 

.... the Company’s interim CEO, Mr Ho Ker Chern, the Audit Committee Chairman, Mr Lim Yeow Hua and the independent auditors (collectively, the “Working Parties”) made an impromptu visit to ABC Bank, Jinjiang Chendai Branch. They managed to meet the ABC Bank staff who handled the ABC Confirmation previously and she reaffirmed that the ABC Confirmation was verified by the bank branch. At the same visit, the Working Parties also met up with the branch manager of ABC Bank, Jinjiang Chendai Branch, Mr Zhang Liwei (张立伟) (“Manager Zhang”) and showed him the ABC Confirmation. Manager Zhang also affirmed that the ABC Confirmation was verified by ABC Bank and informed the Working Parties that HMW has been a good customer and did not have any bank loans with the bank.

So far so good, all seems to be fine, what could ever be wrong?

And then the bomb went off:

On 14 February 2014, the Company received a reply from ABC Bank, Jinjiang Chendai Branch (“ABC Response”). In their response, ABC Bank alleged that the 24 January Statement and the ABC Confirmation were not given by ABC Bank but were provided by the “finance company of HMW”. They also enclosed a confirmation signed by Mr Lin (in his capacity as the legal representative of HMW) on 8 February 2014 stating the same (“Lin Confirmation”). In the ABC Response, the bank also clarified that the cash and loan balances stated in the aforesaid documents were inconsistent with the bank’s records but did not elaborate further.

The Board was taken aback by the ABC Response as the 24 January Statement was taken from ABC Bank’s website and the ABC Confirmation was given by the bank’s employee at the bank’s premises previously. Moreover, the Working Parties had also met up with Manager Zhang as aforesaid and he had reaffirmed the documents then. 

And that sums up the problems with investing in Chinese companies, listed in Singapore (or Malaysia for that matter): even the bank balance can't be trusted.

My guess is, there is a huge difference in the bank balance, and (needless to say) the difference is not in a positive way.

On top of that, I don't like the response of the bank, they should mention how much the bank balance is, according to their books. They know from the correspondence that there are some major problems regarding HMW, and they should fully cooperate. By not elaborating they have not cooperated, I have some serious doubts with whom their loyalty lies.

"Given the discrepancies relating to the bank cash balances, the Audit Committee intends to conduct a special audit into the financial affairs of the Group, which could include, inter alia, ascertaining the bank cash balances, verifying the accounts receivables and payables and confirming the property, plant and assets of the Group.

However, given that the above would require the cooperation of the PRC management, there is no assurance that the special auditors (when appointed) would be able to conduct the special audit."

In other words, we might never even know how bad the situation is, or what exactly has happened. Pretty shocking.

And some more bad news:

"Due to the disruption to the Company’s management, the Group’s operations in China remain suspended and the staff did not return to work since the end of the Chinese New Year holiday period."

Investors who own shares in Eratat should be prepared for the worst. The share is suspended.

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