Sunday, 3 May 2015

China Ouhua: red wine and red flags (4)

China Ouhua announced their audited accounts, qualified by the auditors (as was the case in the previous year), with some really bad news for the shareholders:

When Ouhua IPO-ed, they were supposed to be a fast-growing, highly profitable player in the wine industry in China.

Now it informs its shareholders that it abandoned its vineyards due to bad weather, insect pest and (worst of all) poor management? The vineyards are their main business to produce their own wine, it cant possibly get much worse than this, can it?

Despite the wine business going horribly wrong for Ouhua, they still deposited RMB 119M cash to purchase land, "conveniently" without having any independent valuation done. The transaction should have been concluded a long time ago, but is still "pending".

I am afraid that either this transaction will go through, and the land is useless given the abandoned vineyards, or the transaction will not go through, and the deposit will not be returned.

Michael Lewis wrote in "Crash Boys":

"Financial regulators, like editorial writers, are at best the markets’ last line of defense; they are less inclined to join any battle than they are to wander in afterward and shoot the wounded."

Malaysian regulators have done some enforcement that (I think) falls in this last category ("wander in afterward and shoot the wounded"), for instance:

SAAG: " ..... Notwithstanding that SAAG had been de-listed ...."
Carotech: "..... Notwithstanding that CAROTEC was de-listed ....."
MAE Models: "..... Notwithstanding that MAEMODE was de-listed ....."
EcoFuture: ".... Notwithstanding that EFUTURE had been de-listed ....."
Baswell: ".... Notwithstanding that BASWELL had been de-listed ....."
Axis: "..... Notwithstanding that AXIS had been de-listed ....."
NAMFATT: "..... Notwithstanding that NAMFATT has been de-listed ....."
Global Carriers: "..... Notwithstanding that GLOBALC was de-listed ....."
Kenmark: "..... notwithstanding that KENMARK had been de-listed ...."
Intelligent Edge Technologies: "..... Notwithstanding that IE was de-listed ....."

I hope that the regulators in the case of Ouhua will not wait for the company to be delisted, and take appropriate action now, it is long overdue in my opinion.

They should order an in-depth investigation, not only at the current situation and the recent developments, but also at the whole IPO process, the warranties and representations that were provided, all the parties involved (the promoter, the bankers, the advisors, the pre-IPO shareholders) and the roles they played. They should also interview the many directors that have resigned, and the previous auditor.

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