Saturday, 8 February 2014

Eratat: another S-chip bites the dust

Eratat Lifestyle Ltd, one of the many so-called S-chips trading on the SGX, seems to have run into some very serious problems. According to this announcement:

"Prior to the receipt of the Acceleration Notice, the Audit Committee had approached CEO Lin to understand why the Company was not able to make the interest payment notwithstanding the HMW Cash Balance and the SAFE Letter. CEO Lin was not able to provide any satisfactory explanation. A suggestion was then made for CEO Lin to transfer the interest payment to an onshore account designated by the Bondholder so as to avoid any possible offshore remittance issue. Even then, CEO Lin was unable to accede to the above request without any satisfactory explanation.
The Chairman of the Audit Committee, Mr Lim Yeow Hua, and Company’s CFO, Mr Ho Ker Chern, also flew to Jinjiang, Fujian on 28 January 2014 to meet CEO Lin with a view to understand and resolve the above issues. However, CEO Lin said that he was in Beijing and could not meet them and he also did not take any steps to meet the requirements of the Bondholder and the Audit Committee.
In view of the above events, the Audit Committee has decided to suspend CEO Lin from his duties with immediate effect and also appointed the current CFO of the Company, Mr Ho Ker Chern, to take over as interim CEO to verify the HMW Cash Balance as well as the Group’s other cash balances, secure control over the Group’s bank accounts and facilitate any investigation into the affairs of the Group."

This sounds all pretty serious, both the default on the bond issue and the behaviour of the CEO.

The bond issue was anyhow very controversial, why does a company with a large amount of cash need debt?  About five months ago this issue was raised by Mothly Fool: "An Example Of Poor Financing Decisions":

"Under the agreement between SHK and Eratat, the former would purchase bonds, which would come due on June 2015, from the latter at a price of RMB100.5m. In addition, the interest payments for the bond would amount to RMB16.75m per year, bringing the effective interest rate on the bonds to 16.67% per year!

Even without any reference, that’s an unduly high amount of interest to be paid for a bond that has a maturity of only 2 years. Usually, bonds with higher interests are ones with longer maturity dates, in which the long time-span from issue-to-maturity would mean that the creditor is exposed to more risks.
Prior to the bond issue, Eratat’s latest financials showed that it had cash on hand of RMB545m with zero debt. This meant that it could have used its cash hoard, without undue stress on its finances, to fund the corporate activities that were just mentioned instead of relying on expensive debt. But as we know, Eratat decided to take on costly debt to “strengthen its financial position” despite management acknowledging the fact that the company has sufficient working capital for its needs.
Eratat’s annual interest payment of RMB16.75m for its bonds makes up almost 12% of its profit of RMB142 for the whole of last year showing how the bond issue isn’t exactly a shareholder friendly move as the interest payments are added expenses that might lower the company’s profits substantially."

As "D.O.G." commented, SHK is not related to Sun Hung Kai Properties, the well known Hong Kong property player.

SHK is controlled by Malaysia born tycoon Lee Ming Tee, who was jailed for one year "over his role in a deception to inflate the true value of the Allied Group. Mr Justice Michael Burrell described the case as 'an extraordinary piece of criminal litigation' and refused to impose a suspended sentence".

Lee is described as a "one-time scourge of the Australian stockmarket" and is linked to Malaysia's listed Mulpha International:

"Lee officially divorced himself from his Malaysian-listed property vehicle, Mulpha International, because of the onset of the fraud charges six years ago and is thought to have divested most of his wealth to his family. Mulpha International is run by his son, Lee Seng Huang, who owns a 4 per cent stake."

Sun Hung Kai & Co is mentioned many times on David Webb's website, which is not a good place to be, since all articles are distinctively negative: suspensions, fines, market manipulation, etc. Lee Ming Tee received a place in Webb's "Hall of Shame".

SGX and MAS have just proposed measures to strengthen the securities market in Singapore. A rather obvious one was left out: not to allow China based companies anymore to list on the SGX.

If the cash balance of a company can't be trusted, and executive directors behave in erratic ways, then all fundamentals go out of the window. What is left is a punt, not an opportunity to invest.

I don't want to suggest that all China-listed companies in Singapore (or Malaysia) are frauds, just too many are behaving in a dubious manner. China is still developing very fast, capitalism has only arrived about two decades ago at its shores. We need to wait may be 10 or 20 years for all to have settled.

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