Two more independent directors of XingQuan resigned, "Due to time commitment issue" and somewhat more specific:
As he will not be able to discharge and perform the duties and responsibilities of an independent director due to the expiry of the employment contract of the CFO in early May 2017, the resignation of Audit Committee Chairman in end of May 2017, the recent resignation of the other independent director, and the inability of the Company to secure suitable candidates to fill the aforesaid vacancies since May 2017, he therefore tender resignation as an independent director.
That means that the audit committee is now vacant, as is the department of independent directors. Any takers? If not, who will defend the rights of the minority investors?
I have warned several times about XingQuan, the first time (XingQuan: does the company believe its own cash?) almost exactly two years ago.
So far no visible action has been taken by the authorities. Did it really have to come this far? Fast, adequate action might for instance have prevented the rights issue, pouring more good money after bad. Or may be some of the assets could have been saved and liquidated, to the advantage of the minority investors.
In a unrelated case, the Securities Commission has taken action against a father and son for submitting false or misleading information. But the punishment is a mere reprimand and permanent moratorium regarding listings in Malaysia. I guess the perpetrators will simply shrug their shoulders and move on, the world outside Malaysia is pretty large after all.
The real test will be if the Malaysian authorities will be able to fine foreigners or impose a jail sentence. So far no action of that kind has ever been taken against any of the listed Chinese companies in Malaysia. Time will tell if it ever will happen.
If it turns out to be near impossible to impose these penalties, then Bursa should never have allowed foreign companies to list in Malaysia, because of the absence of any significant deterrent.
Showing posts with label China listed. Show all posts
Showing posts with label China listed. Show all posts
Thursday, 3 August 2017
Sunday, 25 June 2017
China government auditor detects fraud
Shocking (although not unexpected) article in The Malay Mail by Reuters: "China auditor uncovers 200b yuan in fake revenue at state firms", some snippets:
China’s government auditor said in its 2016 report published today that 18 of 20 central state firms it audited had inflated revenue by 200 billion yuan (RM125.4 billion) and profits by 20.3 billion yuan in recent years.
The companies audited include China National Petroleum Corporation, China Huaneng Group and Sinochem Group.
The report from the National Audit Office also said that due to inadequate risk control measures, the 20 centrally-administered firms had put overseas investments worth 38.5 billion yuan at risk.
Implications for China listed companies in Malaysia are bad, I expect things to be worse from an accounting point of view. Several of those companies are finally showing their true colours.
Will there be even a sliver of justice by the authorities coming down on the real culprits, and will the Chinese authorities lend a helping hand? I strongly doubt it.
With hindsight we are all experts. But the sad part is that many warnings were out there, already a long time ago. One of my first blog postings from 2011 (!) can be found here: China companies listed on BM.
"Where is Ze Moola" had written a lot about the same issue long before that.
Malaysian investors who poured hundreds of millions of RM in the IPOs of these companies have been hugely disadvantaged. Was this really necessary, should the authorities have listened more to the critical voices?
China’s government auditor said in its 2016 report published today that 18 of 20 central state firms it audited had inflated revenue by 200 billion yuan (RM125.4 billion) and profits by 20.3 billion yuan in recent years.
The companies audited include China National Petroleum Corporation, China Huaneng Group and Sinochem Group.
The report from the National Audit Office also said that due to inadequate risk control measures, the 20 centrally-administered firms had put overseas investments worth 38.5 billion yuan at risk.
Implications for China listed companies in Malaysia are bad, I expect things to be worse from an accounting point of view. Several of those companies are finally showing their true colours.
Will there be even a sliver of justice by the authorities coming down on the real culprits, and will the Chinese authorities lend a helping hand? I strongly doubt it.
With hindsight we are all experts. But the sad part is that many warnings were out there, already a long time ago. One of my first blog postings from 2011 (!) can be found here: China companies listed on BM.
"Where is Ze Moola" had written a lot about the same issue long before that.
Malaysian investors who poured hundreds of millions of RM in the IPOs of these companies have been hugely disadvantaged. Was this really necessary, should the authorities have listened more to the critical voices?
Sunday, 27 November 2016
Chinese "IPO fraud school"
Interesting article on Seeking Alpha:
KGJI: A 'Fraud School' Success Story
Muddy Waters, a research firm that has exposed many Chinese frauds, authored a White Paper on the organized network that brought numerous fraudulent companies onto U.S. exchanges. The presentation and research paper, Frauducation, cited a 2012 Chinese Today's Fortune article that discussed an investigation into a Chinese "fraud school." The article (translated into english) describes a "systematically criminal" platform:
... the "fraud school" is a small investment bank and financing counseling company. It uses a network of accounting firms and law firms based in HK and US to jointly operate to present "trash" enterprises as fast-growing and huge-profitmaking super stars, thus catching the foreign investors' eyes, gaining private funding, and subsequently going public in the US....After that, they will keep coaching the firm on producing falsified reporting documents in order to make it keep "growing" with the eventual goal of listing on a primary exchange (i.e. NYSE or NASDAQ) and collect even more money from US investors.
While the investment bank leading the fraud school was not specifically named in the article, the research paper highlighted the likelihood of it being a Hong Kong outfit named Chief Capital.
The Frauducation white paper also examined the audit firm of Jimmy C.H. Cheung & Company. Cheung was the earliest auditor of record for RINO and audited ChinaCast (OTCPK:CAST) which, according the SEC, was a "massive" fraud. We discovered that Cheung also performed audit work for Kingold.
The article further details alleged irregularities regarding Kingold. The share of Kingold went down from 2.00 to about 1.30, but recovered to 1.60 on Friday.
A video by Muddy Waters about the alleged Chinese fraud school can be found here.
I am not aware if any Bursa or SGX listed company went to this alleged fraud school. But the audit firm of Jimmy C.H. Cheung & Company (featured in the above video) did auditing work for a SGX listed company.
The firm is called International Healthway Corp (IHC), from it's IPO offer document (dated 1 July 2013)
And it seems that nothing has changed, the same auditor is still auditing the subsidiaries in Hong Kong according the the latest anual report. That looks like a red flag.
But there are many more red flags. Investor Central in an article named "International Healthway Corporation Limited - Do the directors really live in the Thye Hong industrial building in Leng Kee?" came up with "29 questions that need to be asked".
And according to this article the authorities are also looking at trading of IHCs shares.
Even in the boardroom there seems to be problems.
The auditor of IHC (PricewaterhouseCoopers) issued a "disclaimer of opinion" in the 2015 annual report:
KGJI: A 'Fraud School' Success Story
Muddy Waters, a research firm that has exposed many Chinese frauds, authored a White Paper on the organized network that brought numerous fraudulent companies onto U.S. exchanges. The presentation and research paper, Frauducation, cited a 2012 Chinese Today's Fortune article that discussed an investigation into a Chinese "fraud school." The article (translated into english) describes a "systematically criminal" platform:
... the "fraud school" is a small investment bank and financing counseling company. It uses a network of accounting firms and law firms based in HK and US to jointly operate to present "trash" enterprises as fast-growing and huge-profitmaking super stars, thus catching the foreign investors' eyes, gaining private funding, and subsequently going public in the US....After that, they will keep coaching the firm on producing falsified reporting documents in order to make it keep "growing" with the eventual goal of listing on a primary exchange (i.e. NYSE or NASDAQ) and collect even more money from US investors.
While the investment bank leading the fraud school was not specifically named in the article, the research paper highlighted the likelihood of it being a Hong Kong outfit named Chief Capital.
The Frauducation white paper also examined the audit firm of Jimmy C.H. Cheung & Company. Cheung was the earliest auditor of record for RINO and audited ChinaCast (OTCPK:CAST) which, according the SEC, was a "massive" fraud. We discovered that Cheung also performed audit work for Kingold.
The article further details alleged irregularities regarding Kingold. The share of Kingold went down from 2.00 to about 1.30, but recovered to 1.60 on Friday.
A video by Muddy Waters about the alleged Chinese fraud school can be found here.
I am not aware if any Bursa or SGX listed company went to this alleged fraud school. But the audit firm of Jimmy C.H. Cheung & Company (featured in the above video) did auditing work for a SGX listed company.
The firm is called International Healthway Corp (IHC), from it's IPO offer document (dated 1 July 2013)
And it seems that nothing has changed, the same auditor is still auditing the subsidiaries in Hong Kong according the the latest anual report. That looks like a red flag.
But there are many more red flags. Investor Central in an article named "International Healthway Corporation Limited - Do the directors really live in the Thye Hong industrial building in Leng Kee?" came up with "29 questions that need to be asked".
And according to this article the authorities are also looking at trading of IHCs shares.
Even in the boardroom there seems to be problems.
The auditor of IHC (PricewaterhouseCoopers) issued a "disclaimer of opinion" in the 2015 annual report:
Thursday, 6 October 2016
Multi Sports: new independent directors
Article from The Edge "Multi Sports gets new independent directors", some snippets:
Multi Sports Holdings Ltd's shareholders had yesterday approved the appointment of six independent directors to oversee and revamp the shoe manufacturer's operations.
Today, Multi Sports told Bursa Malaysia that Multi Sports shareholders had at the company's special general meeting approved the appointment of Kasinathan Tulasi, Naren Anand Gill, Clarence Yeow Kong Chew, Cheh Chee Mun, Guan Swee Kee and Terence Selvarajah as directors.
Multi Sports major shareholder Paramjit Singh Gill had earlier requisitioned the shareholders' meeting.
Paramjit said he wished to appoint the independent Malaysian directors to "investigate and regularise" the company's operations.
It will be interesting to follow this case, both specifically regarding Multi Sports and in general regarding Chinese listed companies on Bursa.
Officially (according to its last quarterly report) the company has plenty of cash, but given the last quoted share price, there were not many people who actually believed those numbers.
Will Paramjit and his team be able to discover the true situation, what has happened to the company since it IPO-ed on Bursa? Will they be able to extract some value for the minority shareholders? Will Chinese regulators swing into action, when needed?
In my humble opinion shareholders of Multi Sports should count on a total loss, and the (alleged) perpetrators will go scot-free. I hope I am wrong and have to eat my words.
Multi Sports Holdings Ltd's shareholders had yesterday approved the appointment of six independent directors to oversee and revamp the shoe manufacturer's operations.
Today, Multi Sports told Bursa Malaysia that Multi Sports shareholders had at the company's special general meeting approved the appointment of Kasinathan Tulasi, Naren Anand Gill, Clarence Yeow Kong Chew, Cheh Chee Mun, Guan Swee Kee and Terence Selvarajah as directors.
Multi Sports major shareholder Paramjit Singh Gill had earlier requisitioned the shareholders' meeting.
Paramjit said he wished to appoint the independent Malaysian directors to "investigate and regularise" the company's operations.
It will be interesting to follow this case, both specifically regarding Multi Sports and in general regarding Chinese listed companies on Bursa.
Officially (according to its last quarterly report) the company has plenty of cash, but given the last quoted share price, there were not many people who actually believed those numbers.
Will Paramjit and his team be able to discover the true situation, what has happened to the company since it IPO-ed on Bursa? Will they be able to extract some value for the minority shareholders? Will Chinese regulators swing into action, when needed?
In my humble opinion shareholders of Multi Sports should count on a total loss, and the (alleged) perpetrators will go scot-free. I hope I am wrong and have to eat my words.
Friday, 9 September 2016
Xingquan: heavy losses (3)
Bursa was aparently not too happy about the explanation given by Xingquan and queried the company again, quite rare that something like that happened.
The company responded with an announcement.
It continues to be a strange case that an alleged batch of 3.6 million (!) custom made shoes did not meet the requirements. Common sense would dictate to have samples send to the customer, and subsequently the shoes in batches, with each quantity to be confirmed in writing by the customer having received them in good order.
But then again, Chinese companies listed on Bursa (or other foreign bourses) often seem to defy logic.
Mercury Securities issues research reports regarding Xingquan (a rather unenviable task, but then again, they do it voluntarily and even get some financial compensation for it), and decided to switch to a "Sell" recommendation, after having recommended to "Buy" the stock since its listing. In its very first report it came up with a target price of RM 1.96, a far cry of the current price of RM 0.105.
Mercury notes:
"Based on our forecast of Xingquan’s FY17 EPS and an estimated P/E of 1.5 times, we set a FY17-end Target Price (TP) of RM0.13. This TP is 3 sen lower than the market price at the start of the date of this report. Our TP for Xingquan reflects a P/BV of 0.07 times over its FY17E BV/share."
A bit peculiar, if I may add, either one trusts the numbers of Xingquan, and then a P/E of 1.5 and P/BV would mean a screaming "Buy".
Or one does not trust the numbers, and any valuation would be too much.
I don't own any share in Xingquan (or any other China listed company listed on Bursa), so the reader can guess in which camp I belong. On a side note, I do own some shares of Chinese companies, but large ones, with a much better CG track record, listed in Hong Kong.
The report continues:
"Unfortunately, we note that the investing public’s perception of PRC (People’s Republic of China)i.e. China-based companies that are listed outside China/Hong Kong, may not be entirely favourable."
And that may be the understatement of the year.
"PRC companies listed in Malaysia and Singapore are normally not especially large-cap, and as such may not be very liquid."
Liquidity has nothing to do with it, I think, I would be more than happy to own illiquid shares with a P/E of 1.5, that is, if I trusted the numbers.
Nevertheless, we opine that with concerted efforts from various parties, the investing public’s perception on PRC companies listed here can be improved. This would include efforts such as – hiring top PR/IR agencies, arranging site visits and conducting investor road-shows.
"Hiring top PR/IR agencies" ...... I think that is about the last thing that is needed, more spin stories.
What the China listed companies should do is:
Unfortunately, I have not yet seen that happen with any of these companies.
The company responded with an announcement.
It continues to be a strange case that an alleged batch of 3.6 million (!) custom made shoes did not meet the requirements. Common sense would dictate to have samples send to the customer, and subsequently the shoes in batches, with each quantity to be confirmed in writing by the customer having received them in good order.
But then again, Chinese companies listed on Bursa (or other foreign bourses) often seem to defy logic.
Mercury Securities issues research reports regarding Xingquan (a rather unenviable task, but then again, they do it voluntarily and even get some financial compensation for it), and decided to switch to a "Sell" recommendation, after having recommended to "Buy" the stock since its listing. In its very first report it came up with a target price of RM 1.96, a far cry of the current price of RM 0.105.
Mercury notes:
"Based on our forecast of Xingquan’s FY17 EPS and an estimated P/E of 1.5 times, we set a FY17-end Target Price (TP) of RM0.13. This TP is 3 sen lower than the market price at the start of the date of this report. Our TP for Xingquan reflects a P/BV of 0.07 times over its FY17E BV/share."
A bit peculiar, if I may add, either one trusts the numbers of Xingquan, and then a P/E of 1.5 and P/BV would mean a screaming "Buy".
Or one does not trust the numbers, and any valuation would be too much.
I don't own any share in Xingquan (or any other China listed company listed on Bursa), so the reader can guess in which camp I belong. On a side note, I do own some shares of Chinese companies, but large ones, with a much better CG track record, listed in Hong Kong.
The report continues:
"Unfortunately, we note that the investing public’s perception of PRC (People’s Republic of China)i.e. China-based companies that are listed outside China/Hong Kong, may not be entirely favourable."
And that may be the understatement of the year.
"PRC companies listed in Malaysia and Singapore are normally not especially large-cap, and as such may not be very liquid."
Liquidity has nothing to do with it, I think, I would be more than happy to own illiquid shares with a P/E of 1.5, that is, if I trusted the numbers.
Nevertheless, we opine that with concerted efforts from various parties, the investing public’s perception on PRC companies listed here can be improved. This would include efforts such as – hiring top PR/IR agencies, arranging site visits and conducting investor road-shows.
"Hiring top PR/IR agencies" ...... I think that is about the last thing that is needed, more spin stories.
What the China listed companies should do is:
- Markedly improve their corporate governance practices, especially in the transparency department
- Share the company wealth with the minority investors, for instance by issuing meaningful dividends, embark on share buyback programs, etc (this can only be done if the alleged reported cash amount is indeed available of course, something I have my doubts about)
- Have a neutral party with relevant expertise (a forensic auditor for instance) confirm the bank balances of the companies
Unfortunately, I have not yet seen that happen with any of these companies.
Monday, 5 September 2016
Xingquan: heavy losses (2)
Bursa queried the company and the company replied.
Good that Bursa took some action and indeed through its questions highlighted relevant issues.
But I think this is not enough, the only correct action is to have an investigative audit on the operations of Xingquan, similar to what happened regarding the marketing issues of Maxwell.
Only that way we can get deep insights what really happened from an objective third party with experience in handling these kind of matters.
For more background on China based companies listed on Bursa, please read the following article at the website of The Edge:
China-based firms now going cheap, any takers?
One snippet:
"When Bursa started looking beyond the shores for potential IPO candidates, its move met with scepticism about attracting the rotten apples, instead, having seen the slew of corporate scandals in Singapore. Simply put, the scepticism seems to have proven that it is not that harsh after all."
Good that Bursa took some action and indeed through its questions highlighted relevant issues.
But I think this is not enough, the only correct action is to have an investigative audit on the operations of Xingquan, similar to what happened regarding the marketing issues of Maxwell.
Only that way we can get deep insights what really happened from an objective third party with experience in handling these kind of matters.
For more background on China based companies listed on Bursa, please read the following article at the website of The Edge:
China-based firms now going cheap, any takers?
One snippet:
"When Bursa started looking beyond the shores for potential IPO candidates, its move met with scepticism about attracting the rotten apples, instead, having seen the slew of corporate scandals in Singapore. Simply put, the scepticism seems to have proven that it is not that harsh after all."
Tuesday, 30 August 2016
Xingquan: heavy losses
Xingquan, another China based counter listed on Bursa I have warned about, announced its results:
Cost of sales of RM 342 Million on Revenue of RM 83 Million, does it make any sense whatsoever?
In the past I have shown doubt about the cash in the company (why issue a rights issue when one claims to be sitting on a huge cash pile?), a few more quarter results like the above and that problem might be "solved".
Cost of sales of RM 342 Million on Revenue of RM 83 Million, does it make any sense whatsoever?
In the past I have shown doubt about the cash in the company (why issue a rights issue when one claims to be sitting on a huge cash pile?), a few more quarter results like the above and that problem might be "solved".
Maxwell: zero revenue!
I have warned many times regarding this counter (and other China listed companies on Bursa), but zero revenue, even I am shocked, any hawker stall will do better than that.
Tuesday, 19 July 2016
Maxwells Mysterious Marketing (4)
I wrote before (here, here and here) about Maxwell's puzzling decision to spend a huge amount of money on billboards with zero impact, for instance:
The company increased its marketing spending by a factor 39 (!) compared to the preceding year, but revenue was down 38%, while gross margin went from 24% to a pathetic 6%.
It all doesn't make any sense whatsoever.
It would be good if the auditor would demand a list of the locations (GPS coordinates) of all 390 billboards and would check a few of them randomly if they exist and if they really feature Maxwell's advertisements.
It seems that the auditor has indeed tried to do that, Maxwell announced today:
.... that the Board has been presented with the Report dated 19 July 2016 by Ferrier Hodgson MH Sdn Bhd (“FHMH”).
Some snippets:
A search on the Six Advertising Contractors (similar to the companies searches made in the Companies Commission of Malaysia) was carried out and it was revealed that two (2) out of the Six Advertising Contractors were not in existence whilst one (1) had already ceased operations.
Numerous requests were made to the MIHB Group’s management for assistance to arrange for meetings with the said Six Advertising Contractors. MIHB Group’s management had represented to FHMH that since the last 10% of the contract sum has not been paid to the Six Advertising Contractors, the relationship between the Six Advertising Contractors and the MIHB Group has gone sour. It was unlikely that the Six Advertising Contractors would be agreeable to a meeting with FHMH.
According to the contracts with the Six Advertising Contractors, 390 billboards were to be erected in cities across the PRC for a one year period from 1 March 2015 to 29 February 2016.
2. Since FHMH's appointment on 21 December 2015, we have not been able to visit any of these 390 sites as the billboards have been dismantled in October 2015 for non-payment of the remaining 10% of the consideration.
The management’s reason for not paying the remaining 10% was that the advertising activities were not positively contributing to the sales of MXCL, notwithstanding the non-payment is a breach of MXCL's contractual obligations.
On 27 January 2016, TSS by way of emails forwarded 53 JPEG files which purportedly show images of billboards of the relevant products being advertised by city only. There is no reference to any streets or buildings numbers or exact locations of same.
5. We had further conducted examination on the JPEG files particularly with respect to the properties and details of each of the JPEG files which suggests that the JPEG files have been created under Adobe Photoshop program.
What a mess!
For those who are counting on some form of justice to be done in China for the Malaysian shareholders of Maxwell: good luck with that.
The share price since it's IPO:
The company increased its marketing spending by a factor 39 (!) compared to the preceding year, but revenue was down 38%, while gross margin went from 24% to a pathetic 6%.
It all doesn't make any sense whatsoever.
It would be good if the auditor would demand a list of the locations (GPS coordinates) of all 390 billboards and would check a few of them randomly if they exist and if they really feature Maxwell's advertisements.
It seems that the auditor has indeed tried to do that, Maxwell announced today:
.... that the Board has been presented with the Report dated 19 July 2016 by Ferrier Hodgson MH Sdn Bhd (“FHMH”).
Some snippets:
A search on the Six Advertising Contractors (similar to the companies searches made in the Companies Commission of Malaysia) was carried out and it was revealed that two (2) out of the Six Advertising Contractors were not in existence whilst one (1) had already ceased operations.
Numerous requests were made to the MIHB Group’s management for assistance to arrange for meetings with the said Six Advertising Contractors. MIHB Group’s management had represented to FHMH that since the last 10% of the contract sum has not been paid to the Six Advertising Contractors, the relationship between the Six Advertising Contractors and the MIHB Group has gone sour. It was unlikely that the Six Advertising Contractors would be agreeable to a meeting with FHMH.
According to the contracts with the Six Advertising Contractors, 390 billboards were to be erected in cities across the PRC for a one year period from 1 March 2015 to 29 February 2016.
2. Since FHMH's appointment on 21 December 2015, we have not been able to visit any of these 390 sites as the billboards have been dismantled in October 2015 for non-payment of the remaining 10% of the consideration.
The management’s reason for not paying the remaining 10% was that the advertising activities were not positively contributing to the sales of MXCL, notwithstanding the non-payment is a breach of MXCL's contractual obligations.
On 27 January 2016, TSS by way of emails forwarded 53 JPEG files which purportedly show images of billboards of the relevant products being advertised by city only. There is no reference to any streets or buildings numbers or exact locations of same.
5. We had further conducted examination on the JPEG files particularly with respect to the properties and details of each of the JPEG files which suggests that the JPEG files have been created under Adobe Photoshop program.
What a mess!
For those who are counting on some form of justice to be done in China for the Malaysian shareholders of Maxwell: good luck with that.
The share price since it's IPO:
Friday, 12 February 2016
Maxwells Mysterious Marketing (2)
I wrote before about this matter.
On February 5, 2016 the company announced the resignation of an independent non-executive director, with the following comment (emphasis mine):
Whether there are any matters that need to be brought to the attention of shareholders:
There is concern on the advertisement expenditure which was disclosed in the Third Quarter 2015 results which management has yet to provide satisfactory justification.
Kudos to Mr. Lee, he could have simply resigned without any comment, but did chose to take a stand, something not often seen in Malaysia. The resignation itself and the above comment are both very clear red flags.
On February 11, 2016 the company announced (emphasis mine):
Further to the Company’s announcement to Bursa dated 30 November 2015 which reported significant net losses for the amount of RM46.253 million for the third quarter ended 30 September 2015 as compared to the net profit reported in the preceding year corresponding quarter of RM12.180 million was mainly due to the advertisement expenses incurred in the retail business, the disclosure made in the announcement in relation to the resignation by Mr Lee Chong Hoe which stated that there was concern over the advertisement expenditure that was disclosed in the third quarter 2015 results which management has yet to provide satisfactory justification on 10 February 2016, the Board wishes to announce that the Company, upon the recommendation of the Audit Committee had on 18 December 2015 engaged Messrs. Ferrier Hodgson MH Sdn Bhd (“FHMH”) to commission an extended scope of audit on the advertisement expenditure in addition to the normal audit.
FHMH is finalising their report with respect to this particular issue and the Company shall make further announcements on the findings in due course.
Further to this, Messrs. Baker Tilly Monteiro Heng, the Statutory Auditors had on 5 February 2016 also highlighted additional issues relating to the annual audit for the year ended 2015 which require further clarification. They have also recommended that an investigative audit to be carried out on these issues. The Independent Directors had on 5 February 2016 and 11 February 2016 also recommended to the management of the Company that an investigative audit to be carried out on the issues raised by Messrs. Baker Tilly Monteiro Heng and are now seeking further clarification and response from the Executive Director of the Company in China.
On February 5, 2016 the company announced the resignation of an independent non-executive director, with the following comment (emphasis mine):
Whether there are any matters that need to be brought to the attention of shareholders:
There is concern on the advertisement expenditure which was disclosed in the Third Quarter 2015 results which management has yet to provide satisfactory justification.
Kudos to Mr. Lee, he could have simply resigned without any comment, but did chose to take a stand, something not often seen in Malaysia. The resignation itself and the above comment are both very clear red flags.
On February 11, 2016 the company announced (emphasis mine):
Further to the Company’s announcement to Bursa dated 30 November 2015 which reported significant net losses for the amount of RM46.253 million for the third quarter ended 30 September 2015 as compared to the net profit reported in the preceding year corresponding quarter of RM12.180 million was mainly due to the advertisement expenses incurred in the retail business, the disclosure made in the announcement in relation to the resignation by Mr Lee Chong Hoe which stated that there was concern over the advertisement expenditure that was disclosed in the third quarter 2015 results which management has yet to provide satisfactory justification on 10 February 2016, the Board wishes to announce that the Company, upon the recommendation of the Audit Committee had on 18 December 2015 engaged Messrs. Ferrier Hodgson MH Sdn Bhd (“FHMH”) to commission an extended scope of audit on the advertisement expenditure in addition to the normal audit.
FHMH is finalising their report with respect to this particular issue and the Company shall make further announcements on the findings in due course.
Further to this, Messrs. Baker Tilly Monteiro Heng, the Statutory Auditors had on 5 February 2016 also highlighted additional issues relating to the annual audit for the year ended 2015 which require further clarification. They have also recommended that an investigative audit to be carried out on these issues. The Independent Directors had on 5 February 2016 and 11 February 2016 also recommended to the management of the Company that an investigative audit to be carried out on the issues raised by Messrs. Baker Tilly Monteiro Heng and are now seeking further clarification and response from the Executive Director of the Company in China.
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?
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?
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:
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.
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.
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.
Monday, 14 September 2015
Asian Financial Statement Analysis
Excellent book by ChinHwee Tan and Thomas R Robinson, highly recommended for all readers who like to dive in company accounts, searching for possible red flags.
The book is dedicated entirely on the situation in Asia, the following cases are handled:
Winsway Coking Coal is interesting, the authors write: "highly unlikely that the company is a fraud". The business model is not transparent and there are many RPTs, but that doesn't automatically mean something is very much wrong, as was alleged by a research report.
A recipe is given for detecting cooked books:
The only pity is that the huge majority of the above cases are China related.
For those people that follow the China listed companies on Bursa or SGX, there will be many familiar red flags.
The book is dedicated entirely on the situation in Asia, the following cases are handled:
- Satyam Computer Services Limited
- Olympus Corporation
- Longtop Financial
- Sino-Forest
- Oriental Century
- RINO International Corp
- Oceanus
- Harbin Electric
- West China Cement
- China Biotics
- Renhe Commercial Holdings
- Duoyuan Global Water
- Winsway Coking Coal Holdings
- China Valves Tech
- Puda Coal
- Sino-Environment Technology Group Ltd
- Celltrion Inc
- Real Gold Mining
- Fibrechem Technologies
Winsway Coking Coal is interesting, the authors write: "highly unlikely that the company is a fraud". The business model is not transparent and there are many RPTs, but that doesn't automatically mean something is very much wrong, as was alleged by a research report.
A recipe is given for detecting cooked books:
- Overstated Earnings or Misclassified Components of the Income Statement
- Overstated Financial Position
- Managed Earnings
- Overstated Operating Cash Flow
- Evaluating Governance, Auditor, and Related-Party Issues
The only pity is that the huge majority of the above cases are China related.
For those people that follow the China listed companies on Bursa or SGX, there will be many familiar red flags.
Sunday, 2 August 2015
XiDeLang: Deal or no deal?
XiDeLang announced:
"..... that the Company is proposing to enter into a Heads of Agreement in relation to the Proposed Acquisition of the entire existing business and undertakings of JinJiang YangSen Garments Co.,Ltd (YangSen) including all of its assets and certain agreed liabilities ("Proposeed Acquisition")."
The wording in the attachment is however different: "that the Company has on 29 July 2015 entered into a Heads of Agreement with YangSen".
"Proposing to enter" and "has entered" are of course very different.
The announcement mentioned that XiDeLang proposes to settle the (yet to be decided) purchase amount "via cash and/ or issuance and allotment of new ordinary shares of USD0.03 each in XDL (“XDL Shares” or “Shares”) at the issue price of RM0.22 per Share".
RM 0.22 was clearly higher than the last traded share price, if the seller of the business is agreeable to receive shares of XiDeLang at such a price that looks like good news. Not surprisingly the share price of XiDeLang increased the next trading day.
Bursa decided to query the company, because the announcement was "rather devoid of details" (to put it mildly).
The company answered the queries in a rather astonishing way:
The following information regarding YangSen is currently unavailable:
How is it possible to sign a Heads of Agreement to purchase a business when the most basic facts are not known? It looks like XiDeLang has not even seen the last accounts.
Why does XiDeLang announce this "non-information", why does it not wait until it has more information?
"..... that the Company is proposing to enter into a Heads of Agreement in relation to the Proposed Acquisition of the entire existing business and undertakings of JinJiang YangSen Garments Co.,Ltd (YangSen) including all of its assets and certain agreed liabilities ("Proposeed Acquisition")."
The wording in the attachment is however different: "that the Company has on 29 July 2015 entered into a Heads of Agreement with YangSen".
"Proposing to enter" and "has entered" are of course very different.
The announcement mentioned that XiDeLang proposes to settle the (yet to be decided) purchase amount "via cash and/ or issuance and allotment of new ordinary shares of USD0.03 each in XDL (“XDL Shares” or “Shares”) at the issue price of RM0.22 per Share".
RM 0.22 was clearly higher than the last traded share price, if the seller of the business is agreeable to receive shares of XiDeLang at such a price that looks like good news. Not surprisingly the share price of XiDeLang increased the next trading day.
Bursa decided to query the company, because the announcement was "rather devoid of details" (to put it mildly).
The company answered the queries in a rather astonishing way:
The following information regarding YangSen is currently unavailable:
- Total assets and total liabilities
- Total profit
- Name of directors and substantial shareholders
- Total contracts value secured
- Distribution networks
- Manufacturing capabilities
How is it possible to sign a Heads of Agreement to purchase a business when the most basic facts are not known? It looks like XiDeLang has not even seen the last accounts.
Why does XiDeLang announce this "non-information", why does it not wait until it has more information?
Monday, 18 May 2015
Synergy between car parts and mining?
China Automobile Parts made an announcement:
The Company wishes to announce that it has been informed by its major shareholder, namely Guotai International Holdings Limited (“Guotai”) (“Vendor”), via its letter dated today that it had entered into a conditional binding heads of agreement (“HOA”) with Siburan Resources Limited (“SBU”) (“Purchaser”), an Australian public-listed company which is a West-Australian based exploration company with tungsten and gold projects in Australia, New Zealand and Papua New Guinea.
The HOA entails the acquisition by SBU of 100,000,000 existing ordinary shares of USD0.10 each (“Sale Shares”) representing 16.67% of the issued capital of CAP from Guotai International Holding Limited, for a total purchase consideration of RM60,000,000 representing a purchase price of RM0.60 per CAP share.
To satisfy the purchase consideration of RM60,000,000, SBU shall issue to Guotai and/or its nominees 417,360,000 fully paid ordinary shares in the capital of SBU or equivalent to 62.5% stake in SBU (after the acquisition) at an issue price of $0.05 per share, which is equal to the Australian dollar equivalent of RM60,000,000.
Siburan is one of those typical Australian listed mining company, tiny and loss making, often based in Perth. Someone "in the know" told me there are hundreds of those.
A few things are rather odd about this proposed deal.
First of all CAP's shares are priced at a huge premium (RM 0.60), while Siburan's shares are priced at market value (AUD 0.05), why?
Secondly, what is the synergy between a Chinese car parts maker and an Australian listed mining company? I don't quite get it.
Thirdly, Siburan has a marketcap of only AUD 14.6M or RM 42M. To buy over shares worth RM 60M, it has to issue an enormous amount of shares, 417M to be exact, while currently there are only 239M issued.
Fourthly, Siburan (while not even holding enough shares to equity account CAP's earnings, for that it needs to own at least 20% of CAP's shares), will be some sort of holding company for these shares.
In other words, there will be a large group of investors (mostly Australians), who own shares in Australia listed company Siburan, which act as a holding company for 16.7% of the shares of Bursa Malaysia listed CAP, which owns a Bermuda listed company, with all of its operations based in China. By the way, the 16.7% might get diluted in a later stage due to a massive 300M warrants that are outstanding for CAP.
Fifthly, shares of CAP went up, from about RM 0.34 to RM 0.42, interesting because for CAP hardly anything will change, except that one major shareholder will sell some of his shares to a new large shareholder, who will appoint one director of CAP.
To me, it all doesn't make any sense at all. But then again, getting Chinese companies listed on Bursa never made any sense to me, so that should not come as a surprise to the readers.
The Company wishes to announce that it has been informed by its major shareholder, namely Guotai International Holdings Limited (“Guotai”) (“Vendor”), via its letter dated today that it had entered into a conditional binding heads of agreement (“HOA”) with Siburan Resources Limited (“SBU”) (“Purchaser”), an Australian public-listed company which is a West-Australian based exploration company with tungsten and gold projects in Australia, New Zealand and Papua New Guinea.
The HOA entails the acquisition by SBU of 100,000,000 existing ordinary shares of USD0.10 each (“Sale Shares”) representing 16.67% of the issued capital of CAP from Guotai International Holding Limited, for a total purchase consideration of RM60,000,000 representing a purchase price of RM0.60 per CAP share.
To satisfy the purchase consideration of RM60,000,000, SBU shall issue to Guotai and/or its nominees 417,360,000 fully paid ordinary shares in the capital of SBU or equivalent to 62.5% stake in SBU (after the acquisition) at an issue price of $0.05 per share, which is equal to the Australian dollar equivalent of RM60,000,000.
Siburan is one of those typical Australian listed mining company, tiny and loss making, often based in Perth. Someone "in the know" told me there are hundreds of those.
A few things are rather odd about this proposed deal.
First of all CAP's shares are priced at a huge premium (RM 0.60), while Siburan's shares are priced at market value (AUD 0.05), why?
Secondly, what is the synergy between a Chinese car parts maker and an Australian listed mining company? I don't quite get it.
Thirdly, Siburan has a marketcap of only AUD 14.6M or RM 42M. To buy over shares worth RM 60M, it has to issue an enormous amount of shares, 417M to be exact, while currently there are only 239M issued.
Fourthly, Siburan (while not even holding enough shares to equity account CAP's earnings, for that it needs to own at least 20% of CAP's shares), will be some sort of holding company for these shares.
In other words, there will be a large group of investors (mostly Australians), who own shares in Australia listed company Siburan, which act as a holding company for 16.7% of the shares of Bursa Malaysia listed CAP, which owns a Bermuda listed company, with all of its operations based in China. By the way, the 16.7% might get diluted in a later stage due to a massive 300M warrants that are outstanding for CAP.
Fifthly, shares of CAP went up, from about RM 0.34 to RM 0.42, interesting because for CAP hardly anything will change, except that one major shareholder will sell some of his shares to a new large shareholder, who will appoint one director of CAP.
To me, it all doesn't make any sense at all. But then again, getting Chinese companies listed on Bursa never made any sense to me, so that should not come as a surprise to the readers.
Sunday, 22 February 2015
Enforcement against Chinese companies listed overseas
If you are transporting 50,000 truckloads of timber across China, it can be hard to see the wood for the trees. If you are trying to audit 68 sq km of Chinese orange groves, you can easily find yourself a few fruit short of a still life. But how, exactly, do you lose track of 2,810 shops full of fluorescent trainers and dayglo “leisure wear”, spread across 21 provinces and three municipalities?
That is the question being asked this week in London, after the non-executive directors of Naibu, a Chinese sportswear company quoted on the Alternative Investment Market, admitted they had lost all contact with the company’s chairman and executive director and had no information on its operations, or its “current financial position”.
Shareholders are well aware of theirs, however: from their first trading in 2012 to their suspension last month, Naibu’s shares have lost 90 per cent.
One of the many horror stories from the Financial Times: "China’s intangible assets at home in Aim".
Some more snippets:
In 1995, timber group Sino-Forest floated in Toronto, rose to a market value of $6bn and gained US fund manager John Paulson as lead shareholder before collapsing amid allegations that its logs were illusory.
Fruit producer Asian Citrus came to the London Stock Exchange in 2005 and grew its share price sevenfold in five years — before losing 90 per cent of its value on claims that it had over-counted its oranges.
One Chinese company, shoemaker Ultrasonic, even offers hope to Naibu investors. After listing in Frankfurt in 2011, its shares fell 79 per cent in a day last year, on news that its chief executive, and much of its cash, had vanished. They recovered when he turned up a few weeks later claiming he had simply lost his mobile phone.
The article further looks at three key aspects:
The functioning of the exchanges
What does it say about London’s Aim that it enabled Naibu’s owners to float just 9 per cent of their shares, gain a £68m valuation for the company and — in the case of two of the top three original shareholders — offload entire stakes, amounting to 30 per cent of the group? Little wonder one FT hack suggests the market be renamed ATM. Sino-Forest’s senior executives found Canada’s market as bountiful: listing and offloading $83m of shares before their company collapsed.
The role of non-executive directors
Under the Aim rules, Naibu’s did not have to adopt the UK Corporate Governance Code, but they were required “to aspire to achieve the key elements”. Yet, in spite of claiming 30 years’ experience of the City, they seemed to do little for their £60,000-a-year part-time salaries beyond setting up an Aim compliance committee — and perhaps hanging on the telephone, in vain, to Fujian province.
The integrity of corporate advisers
Naibu’s nominated adviser, before it relinquished its licence, filled the company’s Aim admission document with claims that it was China’s 10th-largest sportswear brand — in a survey commissioned by Naibu itself — in a booming market. For its diligence, it took an initial fee of £30,000, a further fee of £170,000, and commission at the rate of 5 per cent of the aggregate sums raised.
The above is all very relevant for China listed companies on Bursa and SGX ("S-chips"). My concern in all of this is the enforcement across borders, which seems to me very complicated.
However, there might be some hope. I wrote before about China Sky, Singapore's Business Times reported regarding enforcement against its former CEO, some snippets:
Former chief executive of beleaguered China Sky Chemical Fibre, Huang Zhong Xuan, will pay a civil penalty of S$2.5 million and surrender 10 per cent of his shareholding in China Sky under a settlement agreement with the Monetary Authority of Singapore (MAS).
The civil penalty was meted out after he admitted to making misleading public disclosures and failing to make the required disclosures to the market, thereby breaching the Securities and Futures Act (SFA), the MAS said on Thursday.
The S$2.5 million penalty will be paid from the US$3.7 million in his Singapore bank account, which was frozen under a High Court injunction that MAS obtained in 2013. The surrender or cancellation of his shares will raise the net asset value per share for existing China Sky shareholders.
MAS assistant managing director for capital markets Lee Boon Ngiap said: "The offer by Huang to surrender 10 per cent of his shareholdings in China Sky is the first negotiated settlement of its kind, directly benefiting existing shareholders of China Sky.
CAD director Tan Boon Gin said: "Cases like this have jurisdictional issues that make case resolution challenging. This case has come to a successful resolution through close collaboration between MAS, CAD and SGX, as well as assistance rendered by the authorities and regulators in the People's Republic of China.
That is the question being asked this week in London, after the non-executive directors of Naibu, a Chinese sportswear company quoted on the Alternative Investment Market, admitted they had lost all contact with the company’s chairman and executive director and had no information on its operations, or its “current financial position”.
Shareholders are well aware of theirs, however: from their first trading in 2012 to their suspension last month, Naibu’s shares have lost 90 per cent.
One of the many horror stories from the Financial Times: "China’s intangible assets at home in Aim".
Some more snippets:
In 1995, timber group Sino-Forest floated in Toronto, rose to a market value of $6bn and gained US fund manager John Paulson as lead shareholder before collapsing amid allegations that its logs were illusory.
Fruit producer Asian Citrus came to the London Stock Exchange in 2005 and grew its share price sevenfold in five years — before losing 90 per cent of its value on claims that it had over-counted its oranges.
One Chinese company, shoemaker Ultrasonic, even offers hope to Naibu investors. After listing in Frankfurt in 2011, its shares fell 79 per cent in a day last year, on news that its chief executive, and much of its cash, had vanished. They recovered when he turned up a few weeks later claiming he had simply lost his mobile phone.
The article further looks at three key aspects:
The functioning of the exchanges
What does it say about London’s Aim that it enabled Naibu’s owners to float just 9 per cent of their shares, gain a £68m valuation for the company and — in the case of two of the top three original shareholders — offload entire stakes, amounting to 30 per cent of the group? Little wonder one FT hack suggests the market be renamed ATM. Sino-Forest’s senior executives found Canada’s market as bountiful: listing and offloading $83m of shares before their company collapsed.
The role of non-executive directors
Under the Aim rules, Naibu’s did not have to adopt the UK Corporate Governance Code, but they were required “to aspire to achieve the key elements”. Yet, in spite of claiming 30 years’ experience of the City, they seemed to do little for their £60,000-a-year part-time salaries beyond setting up an Aim compliance committee — and perhaps hanging on the telephone, in vain, to Fujian province.
The integrity of corporate advisers
Naibu’s nominated adviser, before it relinquished its licence, filled the company’s Aim admission document with claims that it was China’s 10th-largest sportswear brand — in a survey commissioned by Naibu itself — in a booming market. For its diligence, it took an initial fee of £30,000, a further fee of £170,000, and commission at the rate of 5 per cent of the aggregate sums raised.
The above is all very relevant for China listed companies on Bursa and SGX ("S-chips"). My concern in all of this is the enforcement across borders, which seems to me very complicated.
However, there might be some hope. I wrote before about China Sky, Singapore's Business Times reported regarding enforcement against its former CEO, some snippets:
Former chief executive of beleaguered China Sky Chemical Fibre, Huang Zhong Xuan, will pay a civil penalty of S$2.5 million and surrender 10 per cent of his shareholding in China Sky under a settlement agreement with the Monetary Authority of Singapore (MAS).
The civil penalty was meted out after he admitted to making misleading public disclosures and failing to make the required disclosures to the market, thereby breaching the Securities and Futures Act (SFA), the MAS said on Thursday.
The S$2.5 million penalty will be paid from the US$3.7 million in his Singapore bank account, which was frozen under a High Court injunction that MAS obtained in 2013. The surrender or cancellation of his shares will raise the net asset value per share for existing China Sky shareholders.
MAS assistant managing director for capital markets Lee Boon Ngiap said: "The offer by Huang to surrender 10 per cent of his shareholdings in China Sky is the first negotiated settlement of its kind, directly benefiting existing shareholders of China Sky.
CAD director Tan Boon Gin said: "Cases like this have jurisdictional issues that make case resolution challenging. This case has come to a successful resolution through close collaboration between MAS, CAD and SGX, as well as assistance rendered by the authorities and regulators in the People's Republic of China.
Friday, 2 January 2015
Moody and its Chinese red flags
From Reuters: "China developer Kaisa says fails to repay $51 mln loan, may default on others"
Chinese property developer Kaisa Group Holdings said it had failed to repay a HK$400 million ($51.3 million) loan and warned it may default on more debt, the latest problem to hit the firm amid a downturn in the real estate sector. In a stock market filing late on Thursday, the company said the payment of the loan and its interest became compulsory on Dec. 31, following the resignation of its chairman Kwok Ying Shing. The failure to repay the HSBC term loan may trigger default on other loan facilities, debt and equity securities, co-chairman Sun Yuenan said in the filing to the Hong Kong exchange.
China observers are most likely not surprised, the Chines property market appeared to be red hot, and the balance sheets of many developers stretched, Kaisa was one of them.
As so often, with 20/20 hindsight we are all experts. But there was one company which did stick out its neck, namely Moody, in 2011. Its report "Red Flags for Emerging Market companies: A Focus on China" can be found here.
Kaisa does indeed feature on the list of Chinese property issuers, with seven possible red flags being tripped and a negative outlook on its bond rating:
We know now that Kaisa is indeed in big troubles, so it appears to be a job well done by Moody's.
But quite soon after publishing the report drew the attention of the Hong Kong regulators, according to this article from Reuters:
"The report caused a sharp fall in the stock and debt prices of some Hong Kong-listed companies it flagged, including West China Cement (2233.HK) whose shares slumped 17 percent before rebounding. That prompted stinging criticism from some market analysts who debated the agency's risk framework, especially since at least one of the so-called "red flags" was publicly denied by one of the companies. The Moody's note also grabbed the attention of the city's market regulator, the Securities and Futures Commission."
David Webb wrote "SFC actions risk chilling critics" about this issue:
.... let's look at the total returns on the stocks since the day before the report (8-Jul-2011) up to the end of 2014 to see whether Moody's scoring system was broadly right. Kaisa's stock is down 42.07% , but it wasn't one of the top 5 companies singled out by the report, which tested 61 companies with 20 possible red flags. The top 5 were: West China Cement Ltd (2233), down 69.76%, Winsway Enterprises Holdings Ltd (1733), down 92.14%, China Lumena New Materials Corp (0067) down 56.86% (and suspended), Hidili Industry International Development Ltd (1393), down 89.07% (source: Webb-site Total Returns) and last but not least, LDK Solar, which was US-listed and is now bankrupt. We'd say that's a pretty good hit rate, even though industry factors are involved in some of the declines. For all HK-listed stocks, the median (718th) stock in that period returned 0.32%.
One can of course argue with Moody's methodology, but that kind of debate on which factors matter for future performance is what makes a market.
The Moody's appeal has yet to be heard, and the SFC's Decision Notice is not yet a public document, so we don't know what the precise allegations are, the arguments in their favour are or what Moody's full appeal will be, but we hope that the SFC has more grounds for complaint than a few errors in a report covering numerous companies, because it would be unreasonable to expect that a report on 61 companies with 20 different flag-tests would be correct on all of the 1220 tests.
And further down the article:
The risk of a chilling effect
Free markets depend on free speech and the open exchange of opinions and analysis, whether it turns out to be right or wrong. The SFC will need to tread very carefully in this area and show good grounds for their actions in the SFAT and MMT, otherwise they are likely to have a chilling effect on critical research. That would be very bad for the market, for at least three reasons:
I can't agree more with that.
Wishing all readers a Happy and Healthy 2015!
Chinese property developer Kaisa Group Holdings said it had failed to repay a HK$400 million ($51.3 million) loan and warned it may default on more debt, the latest problem to hit the firm amid a downturn in the real estate sector. In a stock market filing late on Thursday, the company said the payment of the loan and its interest became compulsory on Dec. 31, following the resignation of its chairman Kwok Ying Shing. The failure to repay the HSBC term loan may trigger default on other loan facilities, debt and equity securities, co-chairman Sun Yuenan said in the filing to the Hong Kong exchange.
China observers are most likely not surprised, the Chines property market appeared to be red hot, and the balance sheets of many developers stretched, Kaisa was one of them.
As so often, with 20/20 hindsight we are all experts. But there was one company which did stick out its neck, namely Moody, in 2011. Its report "Red Flags for Emerging Market companies: A Focus on China" can be found here.
Kaisa does indeed feature on the list of Chinese property issuers, with seven possible red flags being tripped and a negative outlook on its bond rating:
We know now that Kaisa is indeed in big troubles, so it appears to be a job well done by Moody's.
But quite soon after publishing the report drew the attention of the Hong Kong regulators, according to this article from Reuters:
"The report caused a sharp fall in the stock and debt prices of some Hong Kong-listed companies it flagged, including West China Cement (2233.HK) whose shares slumped 17 percent before rebounding. That prompted stinging criticism from some market analysts who debated the agency's risk framework, especially since at least one of the so-called "red flags" was publicly denied by one of the companies. The Moody's note also grabbed the attention of the city's market regulator, the Securities and Futures Commission."
David Webb wrote "SFC actions risk chilling critics" about this issue:
.... let's look at the total returns on the stocks since the day before the report (8-Jul-2011) up to the end of 2014 to see whether Moody's scoring system was broadly right. Kaisa's stock is down 42.07% , but it wasn't one of the top 5 companies singled out by the report, which tested 61 companies with 20 possible red flags. The top 5 were: West China Cement Ltd (2233), down 69.76%, Winsway Enterprises Holdings Ltd (1733), down 92.14%, China Lumena New Materials Corp (0067) down 56.86% (and suspended), Hidili Industry International Development Ltd (1393), down 89.07% (source: Webb-site Total Returns) and last but not least, LDK Solar, which was US-listed and is now bankrupt. We'd say that's a pretty good hit rate, even though industry factors are involved in some of the declines. For all HK-listed stocks, the median (718th) stock in that period returned 0.32%.
One can of course argue with Moody's methodology, but that kind of debate on which factors matter for future performance is what makes a market.
The Moody's appeal has yet to be heard, and the SFC's Decision Notice is not yet a public document, so we don't know what the precise allegations are, the arguments in their favour are or what Moody's full appeal will be, but we hope that the SFC has more grounds for complaint than a few errors in a report covering numerous companies, because it would be unreasonable to expect that a report on 61 companies with 20 different flag-tests would be correct on all of the 1220 tests.
And further down the article:
The risk of a chilling effect
Free markets depend on free speech and the open exchange of opinions and analysis, whether it turns out to be right or wrong. The SFC will need to tread very carefully in this area and show good grounds for their actions in the SFAT and MMT, otherwise they are likely to have a chilling effect on critical research. That would be very bad for the market, for at least three reasons:
- There is a systemic skew in investment bank/broker research which produces far more "buy" or "hold" (don't sell) notes than actual "sell" recommendations, because banks face conflicts of interest in seeking business with companies and in maintaining open doors for their analysts. Often the diplomatic way out is just to quietly drop coverage rather than put out a "sell" note. So we need investors, short or long, to express their opinions freely.
- In China, as with other emerging markets, there are vast problems with corporate governance, fraud and corruption, and these need to be exposed, partly to improve market efficiency and partly to deter such behaviour by reducing the chance that it will remain unnoticed.
- One of Hong Kong's core competitive advantages over mainland China is supposed to be the ability to speak freely.
I can't agree more with that.
Wishing all readers a Happy and Healthy 2015!
Sunday, 7 September 2014
The joke is on the auditors when it comes to true figures
Rather frightening (but not unexpected for insiders) article from the SCMP. And very relevant for Chinese listed companies on Bursa or SGX. Although the listed companies are audited by companies in Malaysia and Singapore, the subsidiaries in China are done by Chinese auditors.
It's been such a depressing week. Let's share some jokes.
And the best jokes are the financial figures of many mainland private enterprises, and the fact that some investors actually believe them.
Talk to any auditor or forensic accountant and he or she will tell you why. Here are a few real cases. Sales confirmation is where audit work begins before an initial public offering. Letters are sent to a company's buyers to verify if it has indeed sold what it claims.
More than a decade ago, unsuspecting accountants trusted company management to post the letters seeking confirmation from buyers on their behalf. Unsurprisingly, many got burned by falsified confirmations.
Auditors began to post the letters themselves. Once again, they were cheated. How? Apparently some staff of companies planning listings kindly showed the auditor his or her way to the nearest mail box or office, which turned out to be a fake or a real office with a "fake" postman.
Some auditors were met by "actors" dressing up as managers in real or fabricated offices
The auditors switched to couriers. By now, some of you will have rightly guessed that companies began to hire "actors" to dress up as courier men to collect the parcels.
The trick was uncovered in one case when some hundreds of confirmation letters, supposedly delivered by couriers and then purportedly returned by mail by buyers from all over the mainland were found to bear the chop of just one post office.
The logical response was for auditors to get their own staff to take the letters to the couriers' collection points, listed on their official websites.
Sounds fool-proof? Not necessarily. In at least one case, the company got hold of the reference numbers for the parcels, tracked them down, recalled them, manipulated them and then posted them back to the auditor.
It's no easy task. Think about getting dozens or even hundreds of men and women to bring falsified confirmations to various parts of the country so that they will bear stamps from different post offices on different days to make them look real.
The logistics are amazing.
Bank statements are another way to verify a company's numbers. If the business is real, it should show up in their accounts.
But some auditors were met by "actors" dressing up as bank managers in real or fabricated offices. When auditors then resorted to online statements, other tricks cropped up.
The company's finance officer would insist that the online statement be viewed in his office for security reasons. So under the eyes of the auditor, the officer would log on to his computer, key in the password to the account and show that every number was in line with his claims.
"In our case, it was uncovered by one of our junior staff who jotted down the website on the screen, searched for it in Hong Kong and found nothing," said an auditor at a mid-sized firm.
When confronted, the finance officer said: "Oh, because of security concerns, it can only be reached by a computer within the mainland." It was subsequently confirmed to be a fake.
How about site visits and stock counting to check the figures? Well, staging a robust business using workers, stock and even factories borrowed from friends is not unheard of.
When suspecting auditors began to hide outside factories to count the number of trucks bringing goods in and out, drivers were hired to run empty trucks around the clock. When some smart auditors uncovered lies from the shallow tyre prints of the trucks, stones and bricks were added to make it appear they were carrying products from the factory.
These tricks may sound crude and become obsolete as the mainland economy increasingly becomes digitised and transparent. The cat-and-mouse-style evolution of the scams, however, tells of unyielding determination and creativity in book-cooking.
This is because the returns are massive. Upon listing, one gets three things: the cash from the public offering; cheap bank loans by pledging the listing proceeds and a controlling stake.
At the same time, the penalties are minimal. After all, the Hong Kong regulators cannot throw you in jail unless you are stupid enough to cross the border or you have messed up with someone powerful.
Remember China Forestry, which was found to have cooked its books with falsified bank statements in 2011? No one has been penalised so far.
It's been such a depressing week. Let's share some jokes.
And the best jokes are the financial figures of many mainland private enterprises, and the fact that some investors actually believe them.
Talk to any auditor or forensic accountant and he or she will tell you why. Here are a few real cases. Sales confirmation is where audit work begins before an initial public offering. Letters are sent to a company's buyers to verify if it has indeed sold what it claims.
More than a decade ago, unsuspecting accountants trusted company management to post the letters seeking confirmation from buyers on their behalf. Unsurprisingly, many got burned by falsified confirmations.
Auditors began to post the letters themselves. Once again, they were cheated. How? Apparently some staff of companies planning listings kindly showed the auditor his or her way to the nearest mail box or office, which turned out to be a fake or a real office with a "fake" postman.
Some auditors were met by "actors" dressing up as managers in real or fabricated offices
The auditors switched to couriers. By now, some of you will have rightly guessed that companies began to hire "actors" to dress up as courier men to collect the parcels.
The trick was uncovered in one case when some hundreds of confirmation letters, supposedly delivered by couriers and then purportedly returned by mail by buyers from all over the mainland were found to bear the chop of just one post office.
The logical response was for auditors to get their own staff to take the letters to the couriers' collection points, listed on their official websites.
Sounds fool-proof? Not necessarily. In at least one case, the company got hold of the reference numbers for the parcels, tracked them down, recalled them, manipulated them and then posted them back to the auditor.
It's no easy task. Think about getting dozens or even hundreds of men and women to bring falsified confirmations to various parts of the country so that they will bear stamps from different post offices on different days to make them look real.
The logistics are amazing.
Bank statements are another way to verify a company's numbers. If the business is real, it should show up in their accounts.
But some auditors were met by "actors" dressing up as bank managers in real or fabricated offices. When auditors then resorted to online statements, other tricks cropped up.
The company's finance officer would insist that the online statement be viewed in his office for security reasons. So under the eyes of the auditor, the officer would log on to his computer, key in the password to the account and show that every number was in line with his claims.
"In our case, it was uncovered by one of our junior staff who jotted down the website on the screen, searched for it in Hong Kong and found nothing," said an auditor at a mid-sized firm.
When confronted, the finance officer said: "Oh, because of security concerns, it can only be reached by a computer within the mainland." It was subsequently confirmed to be a fake.
How about site visits and stock counting to check the figures? Well, staging a robust business using workers, stock and even factories borrowed from friends is not unheard of.
When suspecting auditors began to hide outside factories to count the number of trucks bringing goods in and out, drivers were hired to run empty trucks around the clock. When some smart auditors uncovered lies from the shallow tyre prints of the trucks, stones and bricks were added to make it appear they were carrying products from the factory.
These tricks may sound crude and become obsolete as the mainland economy increasingly becomes digitised and transparent. The cat-and-mouse-style evolution of the scams, however, tells of unyielding determination and creativity in book-cooking.
This is because the returns are massive. Upon listing, one gets three things: the cash from the public offering; cheap bank loans by pledging the listing proceeds and a controlling stake.
At the same time, the penalties are minimal. After all, the Hong Kong regulators cannot throw you in jail unless you are stupid enough to cross the border or you have messed up with someone powerful.
Remember China Forestry, which was found to have cooked its books with falsified bank statements in 2011? No one has been penalised so far.
Saturday, 30 August 2014
Three articles
Three interesting, but not very positive articles, for the full text please click on the links.
Pump and Dump: How to Rig the Entire IPO Market with just $20 Million
How much does it cost to manipulate an entire market? Not much. And it’s getting cheaper!
It was leaked on Tuesday by “people with knowledge of that matter,” according to the Wall Street Journal, that VC firm Kleiner Perkins Caufield & Byers had decided in May to plow up to $20 million into message-app maker Snapchat, for a tiny portion of ownership. An undisclosed investor also committed some funds. The deal, which apparently hasn’t closed yet, would give Snapchat a valuation of $10 billion.
By strategically deploying less than $30 million, KPCB, and DST Global before it, have ratcheted up Snapchat’s valuation from $2 billion to $10 billion. With the stroke of a pen, in a deal negotiated behind closed doors, they have created an additional $8 billion in “wealth” that is now percolating through the minds of employees with stock options and through the books of the early investment funds.
Inflating Snapchat’s valuation by $8 billion with a few million dollars rigs the entire IPO market that depends on buzz and hype and folly to rationalize these blue-sky valuations. Unnamed people “knowledgeable in the matter” who leak these valuations to the Wall Street Journal are an integral part of the hype machine: It balloons the valuations of other startups. And it creates that “healthy” IPO market where money doesn’t matter, where revenues and profits are replaced by custom-fabricated metrics.
The Lawsuit That Could Legalize Pay-To-Play For Pension Fund Investments
Here’s a scenario to chew on:
An investment firm makes a campaign contribution to a city mayor. Later, the mayor appoints members to the city’s pension board. The pension board decides to hire the aforementioned investment firm to handle the pension fund’s investments.
Does something seem fishy about that situation?
The SEC says yes, and they have rules in place to prevent those “pay-to-play” scenarios.
But a recent lawsuit says no: investment managers should be able to donate money to whichever politicians they choose, even if those donations could present a conflict of interest down the line.
Detecting fraud a risk in China
It can be very risky to do things in China that are taken for granted in other countries.
Kun Huang, a Chinese-born Canadian citizen, is back in Vancouver after spending two years in a Chinese jail. His crime was contributing to research that led his employer to recommend short sales of Silvercorp Metals, a silver producer that is based in Canada but does its mining in China.
Mr Huang, now 37, returned to his native China in 2006 after graduating from the University of British Columbia with a degree in commerce. His parents immigrated to Vancouver in 1997, when he was 20 years old, and he became a Canadian citizen in 2002.
His job was to research Chinese companies, which were beginning to list on stock markets in the United States and Canada. He had been hired by Eos, a hedge fund run by Jon Carnes, a Canadian money manager, to “go through all the financial records in Chinese, talk to management and customers and suppliers,” he said in an interview.
At first, Eos looked for good stocks to buy, but Mr Carnes eventually gained a reputation for spotting Chinese frauds, which he publicised online under the name Alfred Little.
Mr Huang had worked on some of those reports but had no run-ins with the Chinese authorities until 2011. In June of that year, he was asked to look into Silvercorp. He said he found that some Silvercorp reports to the Chinese government showed its mines were not doing as well as they were in reports that the company issued in Canada.
He sent associates to the Ying Mine, Silvercorp’s largest operation, in Henan Province, about 500 miles southwest of Beijing. They filmed trucks leaving the mine with ore and picked up samples of the ore that fell off trucks.
In September, an Arthur Little report questioned whether Silvercorp had exaggerated the mine’s production. It said the samples it had picked up had substantially less silver in each ton of rock than the company claimed and that the volume of truck traffic was too light to account for all the ore Silvercorp said it had mined.
The company responded indignantly and demanded investigations into those who had attacked it.
Mr Huang was arrested on December 28 when he tried to fly to Hong Kong from Beijing. A police officer from Luoyang, the city closest to the mine, warned him that if he did not cooperate he could spend four or five years in jail. The officers questioning him took frequent calls – Mr Huang says he believes they were from Silvercorp officials – and then demanded such information as “the password to the Eos mail server”.
Within a few days, Mr Huang was released on bail, prohibited from leaving China. But that status ended abruptly in July 2012 after a column I [Floyd Norris] wrote for The New York Times appeared, quoting Mr Carnes as saying the Luoyang police “arrested, terrorised and forbid my researchers from communicating with me or performing any further research on Chinese companies”.
Mr Huang was rearrested, he told me, with police officers making clear that action was “directly in retaliation” for the column. He spent the next two years in the Luoyang detention centre, in a 300-square-foot cell that held as many as 34 other prisoners, according to a lawsuit Mr Huang filed this month against Silvercorp in Vancouver.
The previous articles about Silvercorp in The New York Times can be found here and here. A website by supporters of Mr Huang can be found here.
Pump and Dump: How to Rig the Entire IPO Market with just $20 Million
How much does it cost to manipulate an entire market? Not much. And it’s getting cheaper!
It was leaked on Tuesday by “people with knowledge of that matter,” according to the Wall Street Journal, that VC firm Kleiner Perkins Caufield & Byers had decided in May to plow up to $20 million into message-app maker Snapchat, for a tiny portion of ownership. An undisclosed investor also committed some funds. The deal, which apparently hasn’t closed yet, would give Snapchat a valuation of $10 billion.
By strategically deploying less than $30 million, KPCB, and DST Global before it, have ratcheted up Snapchat’s valuation from $2 billion to $10 billion. With the stroke of a pen, in a deal negotiated behind closed doors, they have created an additional $8 billion in “wealth” that is now percolating through the minds of employees with stock options and through the books of the early investment funds.
Inflating Snapchat’s valuation by $8 billion with a few million dollars rigs the entire IPO market that depends on buzz and hype and folly to rationalize these blue-sky valuations. Unnamed people “knowledgeable in the matter” who leak these valuations to the Wall Street Journal are an integral part of the hype machine: It balloons the valuations of other startups. And it creates that “healthy” IPO market where money doesn’t matter, where revenues and profits are replaced by custom-fabricated metrics.
The Lawsuit That Could Legalize Pay-To-Play For Pension Fund Investments
Here’s a scenario to chew on:
An investment firm makes a campaign contribution to a city mayor. Later, the mayor appoints members to the city’s pension board. The pension board decides to hire the aforementioned investment firm to handle the pension fund’s investments.
Does something seem fishy about that situation?
The SEC says yes, and they have rules in place to prevent those “pay-to-play” scenarios.
But a recent lawsuit says no: investment managers should be able to donate money to whichever politicians they choose, even if those donations could present a conflict of interest down the line.
Detecting fraud a risk in China
It can be very risky to do things in China that are taken for granted in other countries.
Kun Huang, a Chinese-born Canadian citizen, is back in Vancouver after spending two years in a Chinese jail. His crime was contributing to research that led his employer to recommend short sales of Silvercorp Metals, a silver producer that is based in Canada but does its mining in China.
Mr Huang, now 37, returned to his native China in 2006 after graduating from the University of British Columbia with a degree in commerce. His parents immigrated to Vancouver in 1997, when he was 20 years old, and he became a Canadian citizen in 2002.
His job was to research Chinese companies, which were beginning to list on stock markets in the United States and Canada. He had been hired by Eos, a hedge fund run by Jon Carnes, a Canadian money manager, to “go through all the financial records in Chinese, talk to management and customers and suppliers,” he said in an interview.
At first, Eos looked for good stocks to buy, but Mr Carnes eventually gained a reputation for spotting Chinese frauds, which he publicised online under the name Alfred Little.
Mr Huang had worked on some of those reports but had no run-ins with the Chinese authorities until 2011. In June of that year, he was asked to look into Silvercorp. He said he found that some Silvercorp reports to the Chinese government showed its mines were not doing as well as they were in reports that the company issued in Canada.
He sent associates to the Ying Mine, Silvercorp’s largest operation, in Henan Province, about 500 miles southwest of Beijing. They filmed trucks leaving the mine with ore and picked up samples of the ore that fell off trucks.
In September, an Arthur Little report questioned whether Silvercorp had exaggerated the mine’s production. It said the samples it had picked up had substantially less silver in each ton of rock than the company claimed and that the volume of truck traffic was too light to account for all the ore Silvercorp said it had mined.
The company responded indignantly and demanded investigations into those who had attacked it.
Mr Huang was arrested on December 28 when he tried to fly to Hong Kong from Beijing. A police officer from Luoyang, the city closest to the mine, warned him that if he did not cooperate he could spend four or five years in jail. The officers questioning him took frequent calls – Mr Huang says he believes they were from Silvercorp officials – and then demanded such information as “the password to the Eos mail server”.
Within a few days, Mr Huang was released on bail, prohibited from leaving China. But that status ended abruptly in July 2012 after a column I [Floyd Norris] wrote for The New York Times appeared, quoting Mr Carnes as saying the Luoyang police “arrested, terrorised and forbid my researchers from communicating with me or performing any further research on Chinese companies”.
Mr Huang was rearrested, he told me, with police officers making clear that action was “directly in retaliation” for the column. He spent the next two years in the Luoyang detention centre, in a 300-square-foot cell that held as many as 34 other prisoners, according to a lawsuit Mr Huang filed this month against Silvercorp in Vancouver.
The previous articles about Silvercorp in The New York Times can be found here and here. A website by supporters of Mr Huang can be found here.
Tuesday, 19 August 2014
Eratat: another S-chip bites the dust (5)
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.
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.
Subscribe to:
Posts (Atom)