Sunday, 27 September 2015

XingQuan: does the company believe its own cash?

On September 25, 2015, XingQuan International Sprts Holdings Ltd (XingQuan) announced its audited accounts.

Remarkable is the enormous amount of cash, RMB 1,456,947,000, about RM 1 Billion:

Something else remarkable is the tiny amount of interest the company is earning on the cash:

That is about 0.3% on a yearly base, why such a low number?

Is the cash really in the company, as stated?

Strangely enough, the company also seems to have some doubts, otherwise the following announcement does not make much sense.

The company announced the same day a rights issue with warrants attached.

Why would a company spend RM 1M in money and go through the hassle of additional work for a relatively insignificant amount of RM 26M to be used to buy machineries, when it claims to have about RM 1 Billion in cash?

The company has done the same in the past, but through a private placement (highly dilutive to its shareholders), again for a puzzling small amount of RM 30.7 million:

The rationale given by the company for the rights issue:

Those numbers (pre payments etc.) should show up in the balance sheet, here are they:
  • Inventory RMB 44 million
  • Trade and other receivables RMB 254 million
  • Trade and other payables RMB 68 million
  • Borrowings RMB 18 million
  • Tax payable RMB 7 million

Regarding the inventory and receivables, they might grow when the turnover rises, say with RMB 60 million in the next year, but that would only be 4% of the cash available.

Regarding the payables, borrowings and tax, the total amount is only about 6% of the current cash.

Nothing that even comes even close to the magnitude of RMB 1,457 million cold hard cash.

Next to that, the company claims to have made a net profit of more than RMB 200 million over the last year alone. Profit that is easily enough for the increase in working capital.

In other words, the above rationale as described by the company is dubious at best, it simply does not make any sense.

The rights issue is accompanied by an issue of free warrants. Needless to say, the stock immediately went up, most likely chased by punters who don't quite understand that all shareholders receive the same free warrants and thus that all get diluted in the same way in the long run.

There is a possible way out of the lack of confidence regarding Chinese listed companies on Bursa.

Bursa could ask companies with suspicious high cash levels to voluntarily cooperate in the following exercise:

"Let the highest authority of the banks (not just the branch manager) where they hold the cash verify that the cash balance of (say) the last eight quarterly statements and the average bank balance of (say) the last one year is indeed correct. Let them send this statement to Bursa (or another independent organisation), who will be allowed to check the authenticity of the statement with the source. After checking the statement, it can be announced on Bursa's website"

Companies that cooperate and where the balance does check out will see its share rise, having lifted the suspicion of their high cash bank balance.

Companies that do not cooperate might have something to hide and most likely their share price will suffer. Auditors and Independent directors might start to feel the heat and take appropriate action.


  1. Short term bank borrowing cost was 6.0% in 2014. Is the spread between deposit rate and borrowing rate so wide?

  2. A 1-month fixed deposit in RMB should yield at least 2%. Large amounts on a large timeframe should give a higher yield.