Monday 5 October 2015

XingQuan: does the company believe its own cash? (2)

Bursa has queried XingQuan about its rights issue, and the company has replied:

The Company wishes to clarify that the cash balance of RM886.55 million is mainly reserved for working capital, and as explained in the announcement dated 25 September 2015, Xinquan requires sufficient cash buffer and a high level of working capital to ensure minimal disruption to its operations in the event of a liquidity crisis or a sharp economic downturn. The purpose of the Proposed Rights Issue with Warrants is to raise funds for Xinquan’s capital expenditure requirements whilst maintaining a healthy level of cash balances at all times.

In addition, the available cash balance may also be used for future business expansion into related businesses, in particular, acquisition of foreign brand(s), if and when the opportunity arises.
The Group has placed its cash balances in savings accounts with licensed banks in China which carries an interest rate of approximately 0.35% per annum. The cash is placed in savings accounts as the cash is not idle and is required to fund Xinquan’s day-to-day operations.

I find the answers completely unsatisfactory given the size of its current operations. Just looking at balance sheet items like inventory, receivables, payables etc. gives an indication roughly how much cash the company needs in case the company grows, or in case there is a calamity. The company has abundant cash for all those purposes, much more than needed.

Regarding business expansion, first of all that sounds very vague, secondly those take time, the company could still raise money when the opportunity arises.

The company claims that it can not put money (not even a few hundred million RM) in a fixed deposit since it needs the money in day-to-day operations. That sounds highly questionable. The company should be forced to proof that, by showing the minimum amount of cash throughout the year in all saving accounts.

Chinese listed companies have a really bad reputation for its cash management. There have been fraud cases where the promised money was simply not there. Others have embarked on acquisitions (sometimes in related party transactions) that have destroyed value. They hardly pay out a decent dividend or embark on a share buyback program. In the contrary, they rather use private placements at share valuation below the amount of cash per share.

It doesn't make sense at all, and if that is the case, then in my experience most likely something else is going on, something more sinister.

There is still my suggestion in the previous posting.

More than four years ago I warned already about Chinese listed companies with cash levels that can not be trusted. Free advice for Bursa, it can't get much better than that, can it?


  1. I am not familiar with the interest rate in China. I try to google and found the following rates at HSBC website

    The interest Xingquan earned was about 0.35%. Since they have so much cash, why not put at least half of it as time deposits, which offer much better rates ranging from 1.6% for 3 months to 2.0% for 1 year. For 60 months, the interest rate is higher at 3.05% but the lock-in period may be too long for a listed company

  2. Yes, I found similar deposit rates.

    Their story is they cant do that, they need all to standby for working capital, hence in a savings account. But that doesn't make any sense at all, that is already been taken care, for the most part.

  3. Personally i just avoid china shares for this simple reason: if there's even doubt whether the cash is there, why should investors put their real cash there?
    I am sure there are better companies around for investors to put their money in.