On the same subject, an article in the Business Times (Singapore), some snippets (with some comments by me in red):
The Fujian office of China's bank regulator China Banking Regulatory Commission (CBRC) has found that an Agricultural Bank of China (ABC) bank document purportedly showing a cash balance of 577 million yuan (S$117 million) in an Eratat subsidiary bank account was forged by the subsidiary.
Even more egregiously, representatives of the subsidiary might have impersonated as ABC bank staff to reassure visiting independent auditors and company directors that everything was okay.
They apparently used the bank's Jinjiang Chendai Branch premises earlier this year, verifying the forged bank statement as true. They even informed the visitors that the Eratat subsidiary concerned was a good customer and did not have any loans with the bank.
The news is likely to hit retail investors, who own about three quarters of the company. Eratat had a market valuation of almost S$50 million before trading was suspended in January.
It would be rather naïve if retail investors still expected to get some return on their money, after all the previous information, for instance here. They should have counted on a total loss, anything else would be a bonus.
But Eratat executive director Ye Sanzhi sold off his entire 6.77 per cent stake for S$4.44 million last August.
That is indeed a red flag, and unfortunately not uncommon.
Last November, Eratat was awarded runner-up in the "Most Transparent Company Award 2013, Mainboard Small Caps Category", by the Securities Investors Association of Singapore. The same month, with the company trading at about nine cents a share, Voyage Research had an "increase exposure" call on the company with a target price of 28 cents a share.
Awards etc. do not mean much. There is a whole list of companies being featured on the front page of magazines like Fortune or Forbes which have gone down the drain. Often the moment they were featured was their highest point, after that things only went downhill. Companies with good governance can turn for the worst.
Much more useful is a list of companies with bad governance, they seldom improve.
Showing posts with label Eratat. Show all posts
Showing posts with label Eratat. Show all posts
Tuesday, 19 August 2014
Monday, 18 August 2014
Eratat: another S-chip bites the dust (4)
Announcement by Eratat on the SGX-website:
- HMW is the company’s principal operating subsidiary Fujian Haimingwei Shoes Co., Ltd.
- ABC is the Agricultural Bank of China where Eratat maintained a bank account.
- CRBC is the China Regulatory Banking Commission.
The above announcement seems to indicate a very serious case of fraud, not really unexpected given what happened before, please see the previous blog postings about Eratat.
The above case is also relevant for Chinese companies listed on Bursa Malaysia. There are several China based companies where the amount of cash is unusually high, sometimes as high as RM 1 Billion. The investing public (nor I for that matter) doesn't seem to trust those accounts, and the companies are trading at very low valuations, given their cash holding and profitability per share.
What the Malaysian authorities could do is insist that a high authority at the main office of the banks holding the cash confirm the size of the cash plus indicate that the there are no unreported liabilities. I don't think that is a particularly cumbersome or expensive thing to do.
Either the cash balances (and lack of liabilities) are confirmed as being genuine (in which case the companies might be undervalued), or the opposite (in which case the fraud is exposed, authorities can take action and future damage is prevented, like in Eratat's case).
The transparency provided (either positive or negative) would give a very much needed boost of clarity for all China based companies on Bursa.
- HMW is the company’s principal operating subsidiary Fujian Haimingwei Shoes Co., Ltd.
- ABC is the Agricultural Bank of China where Eratat maintained a bank account.
- CRBC is the China Regulatory Banking Commission.
The above announcement seems to indicate a very serious case of fraud, not really unexpected given what happened before, please see the previous blog postings about Eratat.
The above case is also relevant for Chinese companies listed on Bursa Malaysia. There are several China based companies where the amount of cash is unusually high, sometimes as high as RM 1 Billion. The investing public (nor I for that matter) doesn't seem to trust those accounts, and the companies are trading at very low valuations, given their cash holding and profitability per share.
What the Malaysian authorities could do is insist that a high authority at the main office of the banks holding the cash confirm the size of the cash plus indicate that the there are no unreported liabilities. I don't think that is a particularly cumbersome or expensive thing to do.
Either the cash balances (and lack of liabilities) are confirmed as being genuine (in which case the companies might be undervalued), or the opposite (in which case the fraud is exposed, authorities can take action and future damage is prevented, like in Eratat's case).
The transparency provided (either positive or negative) would give a very much needed boost of clarity for all China based companies on Bursa.
Sunday, 1 June 2014
Eratat: another S-chip bites the dust (3)
I wrote about Eratat Lifestyle Ltd. before, here and here.
Unfortunately, things have progressed as expected. The company made a new announcement, with only bad news in it.
Instead of RMB 577 million the company only had a tiny fraction of that amount in the bank. And to make things worse, it even had RMB 34 million borrowings and RMB 30 million trade bills.
As has been the case in several companies in China, the cash in the bank is simply not there. Normal bank statements, online statements, confirmations by the local bank manager of the opposite, they were all simply useless.
Well, at least it explains why the company had to borrow money.
This would be extremely frustrating for the minority shareholders.
When it rains it pours.
Would it be an idea to have a central fund, in which all listed companies contribute a small amount of money on a yearly basis, which could be used for these kind of cases? That at least the disadvantaged shareholders know what actually had happened, and to enable some sort of justice.
Unfortunately, things have progressed as expected. The company made a new announcement, with only bad news in it.
Instead of RMB 577 million the company only had a tiny fraction of that amount in the bank. And to make things worse, it even had RMB 34 million borrowings and RMB 30 million trade bills.
As has been the case in several companies in China, the cash in the bank is simply not there. Normal bank statements, online statements, confirmations by the local bank manager of the opposite, they were all simply useless.
Well, at least it explains why the company had to borrow money.
This would be extremely frustrating for the minority shareholders.
When it rains it pours.
Would it be an idea to have a central fund, in which all listed companies contribute a small amount of money on a yearly basis, which could be used for these kind of cases? That at least the disadvantaged shareholders know what actually had happened, and to enable some sort of justice.
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.
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.
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.
"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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