China Stationary, unable to contact the 2 remaining directors

Today China Stationary announced the suspension of its shares.

It also announced:


 ..... that the Company is unable to release its Third Quarter Results by 30 November 2017 (“Timeframe”) to Bursa Securities as required under Paragraph 9.22(1) of the MMLR.

The failure to issue the above Third Quarter Results is due to the following reasons:

1. unable to obtain confirmations from third parties (i.e. bankers, debtors, creditors, courts in China etc) to perform verification checks in relation to all litigation cases involving the subsidiaries of CSL;

2. unable to contact the two remaining directors i.e. Mr Chan Fung @ Kwan Wing Yin and Mr Angus Kwan Chun Jut. Hence, no Board of Directors' meeting is held to approve the Third Quarter Results; and

3. unable to undertake the necessary assessment on the impact to the CSL’s financial statements and its operations without the issuance of legal opinion report by Zhi Jun Law Firm of Fujian.


What a joke!

Except of course if you are an investor in this company, in which case you probably have not read this blog.

To rub further salt in the wound, the company accounts were approved until the very end, year 2016:

And according to these numbers the company still had more than RMB 1.8 Billion (!) cash.

That is, if one would actually believe these numbers, the auditor (RT LLP from Singapore)  apparently did so, I don't.

Bursa did indeed issue a directive, which included:


(b)     Verification of CSL’s existing cash and bank balances ....


Unfortunately, much too late, they should have done this many years ago. This company had so many red flags that I lost count.

I hope that Bursa and SC learn from this case and will issue the same directive to all China listed companies. The bad apples will fail, while the good ones (if any) will gain from this exercise.

Will there be any justice in this case? I hope so, but it might be rather difficult, the company is listed in Malaysia, incorporated in Bermuda, has operations and assets in China and its auditors are Singaporean. Good luck with that!

China Automobile Parts: "bad reputation"? (2)

In addition to my previous blog post about this subject, things have possibly made a clear turn for the worse, according to its latest announcement.


The Company’s auditor, PKF has requested to carry out certain procedures that include the verification of the Company’s value added tax devices with the relevant tax authorities’ system directly and complete the verification of the consignment notes/appropriate delivery documentation against the sales invoices. The Company wishes to inform that the tax system in Fujian Province, China underwent three major upgrades and reforms within a year and this may have resulted in certain tax information being inaccurate. In order to meet PKF’s request, the person in charge of the Company is in the midst of liaising with the tax department, so that the auditor can clarify directly with the tax department where necessary.


This seems like a good action by PKF, comparing the official tax numbers with the alleged comparable numbers as provided by CAP. Many short sellers use indeed tax numbers of the company, its subsidiaries or trading partners.


On the auditor’s request to seek confirmation with the banks on the Company’s recorded bank balances, the Company will co-ordinate and make the necessary arrangement with the bank for PKF to seek confirmation verification where applicable.


And this also deserves attention, in several cases of Chinese companies listed on Bursa I have strong doubt about the bank balances. I even recommended Bursa to let all these China based companies to do a voluntarily, independent confirmation of the bank balances by an expert party. If the cash is not there, immediate action can be taken, and there would be no need to throw more good money after bad money (for instance through a rights issue). However, if the cash is really there, then that might add to the credibility of the company.

This confirmation has to be done in a proper way though, there have been cases where a company falsified the statements and the online banking system, and even the regional branch manager of the bank was in the fraud.


The auditor highlighted that it has come to their attention that there appears to be certain ongoing litigation involving the Company and certain of its directors whereby certain records appear to indicate amongst others that the Company had undertaken significant borrowings and had defaulted in repayment, resulting in a claim and litigation during financial year ended 31 December 2016 (“FYE 2016”) against the Company and certain of its directors by the lending bank. The Company wishes to inform that it has appointed a lawyer, Fujian Shi Long Law Firm, to verify and confirm the litigation cases involving the Company and certain of its directors. The Company will make announcement on the development of the above matter in due course if necessary.


If the underlined is indeed true (and the auditor must have had pretty reliable information regarding this, otherwise the above would not have been published), then that would be an extremely serious matter.

Shareholders should brace themselves for the worst.

Maxwell: More Mayhem (2)

Maxwell finally published its annual report, bit too late, but better late than never.

The start is promising:

"Moving Forward", interesting motto, but how to move forward when the revenue of the last three quarters has been exactly zero? In other words, the company has ceased all its business.

Regarding its financial position, the company remarks:

"The Group owned a cash and cash equivalents of RM360.673 million (2015: RM366.713 million) with zero debt as at the end of the financial year 2016. The Group has been in net cash position for the past 6 financial years since it was listed on the Main Market of Bursa Malaysia Securities Berhad back in 2011."

That sounds good, RM 361 Million cash, but the accounts are again heavily qualified by the auditors, and again in relation to its alleged cash (among many other items):

As disclosed in Note 10(b) to the financial statements, during the financial year, Jinjiang Zhenxing Shoes & Plastics Co. Ltd., a subsidiary company of the Company, placed RM337.21 million (RMB510.00 million) with an asset management company, Jinjiang Jin Chuang Private Capital Management Co. Ltd., (“Jin Chuang”) (晋江晋创民间资本管理有限公司). The management of Jinjiang Zhenxing Shoes & Plastics Co. Ltd., are unable to provide the relevant information and supporting documents to the Company in respect of the placement of the cash with the asset management company.

On 26 April 2016, the Company announced that Jinjiang Zhenxing Shoes & Plastics Co. Ltd., had on 6 April 2016 notified Jin Chuang to transfer all the funds. On 19 July 2016, the Company announced that the funds placed with Jin Chuang would be transferred into Jinjiang Zhenxing Shoes & Plastics Co. Ltd.’s bank account or a bank account nominated by Jinjiang Zhenxing Shoes & Plastics Co. Ltd., upon maturity.

We were unable to obtain sufficient appropriate audit evidence on the cash and cash equivalents as at the end of the financial year. Therefore, we could not determine the effect of adjustment, if any, on the financial statements of the Group.

It really seems that the company is dragging its feet in proving that the funds (RM 337 Million) really exist. One possibility (which is rather likely, in my humble opinion) is that the cash is simply not there, it probably never was. It would not exactly be the first time that this would happen to a company from China.

The company further stated:

On 14 April 2017, the Company announced that the Company, Jinjiang Zhenxing Shoes & Plastics Co. Ltd. and Maxwell (Xiamen) Co. Ltd. appointed a legal firm in PRC, namely Shanghai Zinger Law Office (上海致格律师事务所) to conduct a special due diligence on Advertising and Promotion Expenses (Note 30.1(1)) and funds placed with Jinjiang Jin Chuang Private Capital Management Co. Ltd. (晋江晋创民间资本管理有限公司) (Note 30.1(2)) and to issue a special legal opinion thereon. As at the date of this report, the lawyer has yet to issue any legal advice on this matter.

I wrote about this marketing issue 18 months ago, why wait so long to appoint a legal firm to conduct due diligence? What have the independent directors and/or the regulators done all this time? Has there been any activity and/or pressure from their side, or do they let the company continue in this rather shameful way?

Multi Sports: new allegations

I wrote before about Multi Sports.

Although the number of Bursa listed companies from China is only a bit more than one percent of the total, they are experiencing a hugely disproportionate part of the irregularities reported.

That is what more or less could have been expected, for instance based on the experience at the SGX.

Multi Sport is one of those Chinese listed companies on Bursa, beside the problems they already have, they announced new ones:


The Board in Malaysia has also just received details of alleged unreported finance transactions and litigation involving the Company’s operating subsidiary in China, Jinjiang Baixing Shoe Materials Ltd, and the Senior Management of the Company. Should the allegations be validated, such information would be material and would need to be incorporated into the Outstanding Annual Report.


When it rains it pours .....

Chinese "IPO fraud school"

Interesting article on Seeking Alpha:

KGJI: A 'Fraud School' Success Story

Some snippets:

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:

Why REDtone used "auditor of last resort"?

David Webb wrote:


US PCAOB sanctions AWC (CPA) Ltd, its New York affliate and 4 individuals
     
The shocking allegations, which are not denied in this settlement, involve the 2010-2012 audits of Kandi Technologies (Nasdaq: KNDI). Incidentally, AWC (CPA) Ltd changed its name last month to DCAW (CPA) Ltd after combining with Dominic K F Chan & Co. The settlement brings into question the continued role of Albert Wong Chi Wai, the engagement partner on the audits, as an INED of 5 HK-listed companies.    


Paul Gillis wrote about the same matter:

"PCAOB bans auditor of last resort"

On May 19, the Public Company Accounting Board revoked the PCAOB registration of Hong Kong CPA firm AWC (CPA) Limited (AWC), formerly known as Albert Wong & Company. AWC has long been one of the auditors of last resort for Chinese companies listed in the United States, particularly those that came to market through reverse mergers. 

The client that finally brought down AWC was Kandi Technologies Group, Inc. (Kandi). Kandi is a Chinese electric vehicle company that was still using AWC as auditor for 2015.   

Regarding Kandi, a 2014 article from "ShareSleuth" (backed by Mark Cuban).


Some of the companies that were audited by this audit firm can be found here, here and here.

Relevant for Malaysia is REDtone Asia Inc., a 92% subsidiary of REDtone International Bhd, listed on the US OTC (Over The Counter) network.

On May 16, 2016 REDtone Asia Inc. changed its auditor to DCAW (CPA) Ltd.

According to Paul Gillis, that is a "stunt that should not work":

As the PCAOB disciplinary proceeding came to a conclusion, AWC merged with effect from April 30, 2016 with Dominic K.F. Chan & Co to form DCAW, a firm that filed to succeed to the PCAOB registration of Dominic K.F. Chan & Co.  That seems a clever way to circumvent the imminent ban of AWC. On May 9 AWC’s clients announced they were changing auditors to DCAW. The AW in the name presumably is Albert Wong. Albert Wong, however, is personally banned from association with PCAOB registered firms for at least two years. I am sure the PCAOB is looking into this odiferous situation.


Was REDtone really not aware of the reputation of the auditor of its subsidiary?

Maxwells Mysterious Marketing (3)

One problem with China listed companies on Bursa is that the cash balances of many of them seem to be remarkably high. There is a suspicion (at least with me, but probably with most investors, since these companies trade at very low valuations) that the cash might simply not exist. There are precedents for this, both with China listed companies on the SGX and on the Nasdaq.

Maxwell is one of the first of these companies where the suspicion has progressed to the next stage, due to this announcement:


1.         As stated in the third quarterly results ended 30 September 2015, the total amount of cash/cash equivalent were RM257 million. The third quarterly results was announced on 30 November 2015.

2.         The total amount of cash placed with the asset management company, namely Jinjiang Jin Chuang Private Capital Management Co Ltd [晋江晋创民间资本管�?�有��?公�?� ] (“Jin Chuang”) as at 30 September 2015 was RM103.7 million

3.         Messrs Baker Tilly Monteiro Heng’s (“BTMH”), on preliminary assessment with regards to the cash placed with Jin Chuang and pending the commencement of the annual audit, have yet to obtain any documentary evidence for such placements of funds and sufficient information on the nature of business of Jin Chuang.   In addition, BTMH was concerned with the authenticity of these deposits placed with Jin Chuang and the recoverability of the deposits.


The above implies a flag that is as red as red can be.

The announcement continues:


4.         On its preliminary assessment, BTMH noted that based on the announcement of court cases on the website of Fujian Quanzhou Intermediate People’s Court, a company named “Zhenxing” (A subsidiary of Maxwell) is being sued by a company, Fujian Quanzhou Li Cheng Qu Chuang Xing Micro Credit Co Ltd (��?建泉州市鲤城区创信��?��?贷款有��?公�?�) due to a dispute on the loan agreement. The Defendants in the case involve Zhenxing as the borrower, Madam Li Kwai Chun (the Executive Director of Maxwell) and two others as the guarantors.

[Source: http://www.qzcourt.gov.cn/news/ktgg/showinfo.aspx?id=316]

The Management of China Subsidiary claimed that they did not received any documents relating to the litigation before.

Madam Li Kwai Chun represented to the Board that the said loan dispute was in fact involving herself as a personal guarantor and it should not involve the Zhenxing.  Therefore, she will seek the necessary legal advice on the matter.  Further announcement will be made upon the legal council revert with the opinion.


This sounds puzzling as well. Madam Li seems to be a serial guarantor, a previous posting regarding this matter can be found here.

In another Bursa announcement, related to the very high marketing expenses, the company announced:


1. Maxwell (Xiamen) Co. Ltd, the intermediate subsidiary of Maxwell International Holdings Berhad, has executed six contracts with six marketing agents in PRC for promoting and setting-up 390 marketing billboards/LED signboards for a period of one year. The total amount has paid RMB92.4 million in year 2015.


Why spend such a large amount so suddenly through only one marketing channel with no apparent result for the revenue? Why not try a few billboards first, and measure their impact?

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.

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.

Dangers of Private Equity

I am not exactly a fan of PE (Private Equity), have read to many horror stories about this industry. Too often it involves asset stripping and a huge amount of leverage. I guess there are exceptions though, although I haven't seen many.

One interesting read in this category is the following:

"Dick Smith is the Greatest Private Equity Heist of All Time"

"Want to know how to turn $10m in to $520m in less than two years? Just ask Anchorage Capital. The private equity group has pulled off one of the great heists of all time, using all the tricks in the book, to turn Dick Smith from a $10m piece of mutton into a $520m lamb."

And the not unexpected follow up:

"Why Banks Pulled the Pin on Dick Smith"

Cooking the books can only last 2 years

Interesting article in The Economist "How companies massage their profits to beat market forecasts", some snippets:


Executives have every incentive to match or beat forecasts as the market punishes those that fail to do so. That, in turn, hurts the value of the share options which are the best hope of making the executives rich.

A recent academic paper looks in detail at this process (The Valuation Premium for a String of Positive Earnings Surprises: The Role of Earnings Manipulation by Jenny Chu, Patricia Dechow, Kai Wai Hui and Annika Yu Wang). As the authors point out, it is hard to know whether the ability of the corporate sector to beat forecasts is due to good management, a growing economy or outright manipulation. So they focus on companies that the SEC has identified as indulging in manipulation.

Sure enough they find that 53% of such firms have a record of four straight quarters of beating forecasts, compared with just 43% of all firms. Secondly, they find that firms tend to indulge in earnings manipulation when they already have a high stock market multiple; they are trying to prop up their share price, not inflate it. The average price-earnings ratio during the manipulation period is 35.

Third, they find that 42% of manipulating firms beat profits for eight quarters, compared with 32% of all firms. After that, the difference is not statistically significant. So two years seems to be the limit for cooking the books. And fourth, they find that executives focus more on beating forecasts than on beating last year's numbers.


The link to the research paper can be found here.

Scan: sloppy announcement

I wrote before about Scan Associates' rather "frivolous" legal action against Bursa Malaysia.

The company made the following announcement:

Four times the term "Material Litigation".

But, as detailed in an announcement the following day, it actually concerns a "Letter of Demand".

A case of rather sloppy reporting.

Of a much more serious nature was the announcement last week"


"The directors wish to announce that the auditors were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the Company’s and Group’s financial statements for the period ended 30 June 2015."


Next to that, there are the very serious allegations against the ex-CEO and ex-CFO.

The company is losing money badly, and has a negative net asset value. A miracle is needed, soon.

Gates Foundation sues Petrobas

From the BBC:


The Bill and Melinda Gates Foundation has sued the Brazilian state-owned oil company, Petrobras for investment losses due to corruption.

The charity accuses Petrobras of misrepresenting its operations and financial situation to raise billions of dollars.

Prosecutors in Brazil are investigating Petrobras executives for involvement in a massive kickback scheme.

Petrobras has argued the scandal does not involve the company as a whole.

It has said the scandal was caused by contractors, corrupt politicians and a few employees and should not tarnish the company.

The Foundation said its portfolio managers had questioned Petrobras executives about its financial data, but were misled in a "series of materially false and misleading written and oral statements and/or omissions by Petrobras."

Huge difficulties

Petrobras is already facing a number of other US class-action lawsuits.

The scandal has caused huge political difficulties for the Brazilian President Dilma Rousseff, who is not under investigation and has denied all knowledge of the scheme.

Prosecutors have said more than $2bn (£1.32bn) of bribes were paid over a decade, mainly to Petrobras executives from construction and engineering companies.

Some of the money was then passed on to political parties including the governing Workers' Party.

On Monday, the former treasurer of the Workers' Party, was sentenced to 15 years in prison after being convicted of receiving bribes from Petrobras contractors and distributing them to members of the ruling party.

The Bill and Melinda Gates Foundation is also suing Petrobras's auditors, a local affiliate of PricewaterhouseCoopers which it says played a key role in attesting to Petrobras financial statements.


Larger shareholders should consider taking the same action in similar cases in Malaysia, given the slow enforcement, with often low punishment (if any). It would make future perpetrators think twice before cooking the books or making misleading statements. Also auditors should be more inclined to step up their game when they know that the chance of being sued by shareholders of the company they audit is quite high.

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:

• 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.

Hanergy report (3)

Comments of people should not be taken too serious if they are heavily vested.

From my previous posting on Hanergy, the suspended solar energy company:


[Chairman and majority shareholder] Li also told Xinhua that the company was putting on extra shifts at its plants. “We’re in big production. It’s very, very, very good. Hanergy is in the best shape since it started,” he said.


From Forbes: "Suspended Hanergy Thin Film's First-Half Profit Reverses To Loss"


Hanergy Thin Film Power, the Hong Kong-listed solar energy business whose shares have been suspended since May 20 when a plunge in their price wiped out $19 billion of market capitalization in minutes, yesterday posted a loss of HK$59.3 million, or $7.7 million, for the six months ended June 30.  That compares with net income of HK$1.7 billion a year earlier.

Hanergy said the loss resulted in part from the suspension and termination of a majority of connected transactions between Hanergy and its parent company and affiliates, following what the Beijing-headquartered company said on July 16 was an expression of concern by Hong Kong’s securities regulator about their “large number” and the “ongoing viability of the group and its financial dependence” on the parent.


That does not sound like "very, very, very good" .....

AirAsia X: when it rains, it pours

AirAsia X has been in the limelight recently due to its poor results.

The company announced today another negative surprise:


The Board of Directors (“the Board”) of AirAsia X Berhad (“the Company”) wishes to disclose that its internal and external auditors have recently discovered that certain payments have been made to a service provider between the period of 2010 to 2014 for services which are now established to be fictitious.

Following the discovery of the irregularities, the Board has on the recommendation of the Audit Committee appointed PwCCS to carry out a forensics audit and instructed the Management to ensure the availability of all relevant documents and/or key personnel for PwCCS review and interview, where applicable.

In the course of the forensics audit, PwCCS discovered 24 payments have been made to a service provider amounting to RM7.01 million for fictitious services. The payments were authorised by a person in a management position within the Company.


This fraud came at a very unfortunate moment for the company, in the first half of this year the company lost a whopping RM 259 Million. The fraud will further lead to less confidence, and will draw away much needed focus from the management team.

The share is trading at RM 0.16, below its recent rights issue, and very much below its IPO price.

Silverlake Axis down 24%, suspended, after damning report

Trading in Singapore listed, Malaysia based, software solution provider Silverlake Axis was halted today after the share plunged 24%, as reported by The Edge.

The reason for the plunge and the trading halt is the following anonymous report:

"The Unbelievable Financial Alchemy of Silverlake Axis"

It is a rather comprehensive report with quite a lot of detail. I leave it to the readers to draw their own conclusions.

A bit more background about the company and its founder can be found in two recent articles in The Star, here and here. From the last article, one worrisome sentence:


"But investors find it hard to comprehend technology-based companies and even in the region, where Singapore-listed Silverlake Axis has a S$3.19bil market capitalisation, and where the bulk of its business derives from, many do not understand the company."


What now is needed from Silverlake Axis is a comprehensive, blow-by-blow, answer on all allegations in a very short time, preferably over the weekend. A flat denial, a superfluous answer or an attempt to shoot the messenger will simply not do (I guess Noble Group will agree with that, they have tried them all before).

Silverlake Axis should also be able to come up with a quick answer since this report does not come as a surprise. Rumours have been flying regarding this company for quite some time (I was aware of them), witnessed for instance by this article or this posting. In other words, the company was warned and should be prepared.

For Malaysia, it is another blow to its decreasing credibility.

First of all, there are simply too many scandals recently.

Secondly, corruption (one of the country's largest problems) is mentioned in the report as a possibility:

The corruption is not actually proven (that would be very hard to do for an outsider), but in the main report itself there is clearly more detail given than the above.

JES: will the CEO take action against her father?

In Singapore SGX listed (China based) company JES announced that an employee of the company has run away with the company's account books, chequebooks and financial seals, delaying the probe into financial irregularities of Mr. Jin Xin.

Apparently the books were not digitally stored in the "cloud", in which case a simple back-up would have been enough to preserve the data.

The company promised to take necessary action against Jin Xin:

Strong words by the CEO, and certainly a great assurance for the beleaguered shareholders (JES's shares are suspended for four months already) that appropriate action will be taken, until one realizes that Jin Yu is actually the daughter of Jin Xin.

From the Straits Times:


A female employee has delayed an investigation into dubious payments to the former boss of Chinese shipbuilder JES International by "absconding" with the company's books.

JES International has begun legal proceedings in China against the woman, administrative officer Ju Li Li, to recover the documents.

After Mr Jin Xin, the group's former chief executive and chairman, resigned in March, Ms Ju "absconded" with the group's administration records and seals of all its Chinese subsidiaries, JES told the Singapore Exchange last night.

JES, now helmed by Mr Jin's daughter, Ms Audrey Jin Yu, said it had intended to investigate its financials after uncovering possible irregularities during a periodic review. These included "questionable transactions" between the group and companies in which Mr Jin's interests were not declared, JES said.

But "the financial records of the group, including account books, chequebooks and financial seals, had been removed... by relatives of Mr Jin", JES said in its filing.

Mr Jin, who resigned from his post as executive director due to "health issues" on May 25, is not the only one to have quit.

On May 15, JES appealed to the Singapore bourse to extend its deadline for announcing first-quarter earnings, citing "a severe shortage of manpower" after half of its finance department resigned.

JES assured shareholders yesterday that if the books are recovered and Mr Jin is found at fault, "necessary action" would be taken. Trading of JES shares has been suspended since March 4. The shares last traded at 2.6 Singapore cents.

Ire-Tex: MD resigns and is reappointed same day

A remarkable set of events, the company has provided the following clarification:


Reference is made to the Company’s announcement on 29 June 2015 in relation to the retirement of Dato’ Dr Yap Tatt Keat (“Dato’ Dr Yap”) as Managing Director and his subsequent re-appointment on the same day.

The Board of Directors wishes to inform that Dato’ Dr Yap had expressed his intention for early retirement effective from 29th June 2015, post the Company's 13th Annual General Meeting (“AGM”) after 20 years of service with the Ire-Tex Group. Hence, he did not offer himself for re-election at the AGM.

However, due to concerns raised by key stakeholders namely bankers, customers and suppliers, to Dato’ Dr Yap's unexpected early retirement, the Board of Directors had persuaded Dato’ Dr Yap to defer his retirement plans. Consequently, in the best interest of Company, Dato’ Dr Yap had accepted his re-appointment as Managing Director of the Company in the Board meeting held immediately after the AGM. As such, he will remain in the Board until a succession plan is put in place.


Ire-Tex is a company with several, possibly large, problems.

It has just acquired subsidiaries which don't seem to be performing well at all:

There was a large variation in results, always a red flag:

Many changes in directorship in the last year:

 

 

The accounts were qualified (always a large red flag):

In addition to that, the following "emphasis of matter":

An investigative accountant has been appointed, with a very wide scope, 28 action points in total, including allegations in an anonymous letter.

The largest shareholder of Ire-Tex is Tey Por Yee, the third largest is Ooi Kock Aun, the same duo we already met in the Protasco affair:

 

 

Chairman "had something to do", company down USD 19 Billion

Losing a few Billion, it can happen to the best, but losing USD 19 Billion in 24 Minutes, that is pretty tough, even if it is just paper value.

The company in question is Hanergy Thin Film Solar Group Ltd., listed in Hong Kong.

FT reported:


“Chairman Li [chairman and majority shareholder] did not attend the AGM,” said T.L. Chow, an external spokesman for Hanergy. “He had something to do.”


FT has written several times about this company, for instance about its suspicious group structure and the frequent trading between holding company and subsidiary:

FT also reported about the remarkable rise of the share price in the last ten minutes of each trading day (which used to be for years a familiar pattern in the Malaysian context):

David Webb also warned about bubbles and suspicious accounting practices:

Hanergy accounts for revenue and profits on a "percentage of completion basis", which is earlier than actual invoicing. At 30-Jun-2014, Hanergy had net tangible assets of HK$8,023m, of which $4157m was gross amounts due from contracts with Hanergy Affiliates (revenue which had not been billed) and $1914m was receivables from Hanergy Affiliates. It had also made prepayments to Hanergy Affiliates of $1540m for photovoltaic modules for solar power plants (Hanergy is going downstream), most of which had not been delivered. Add that all up and you see that $7611m, or 95% of the net tangible assets, are accounts with Hanergy's parent group. So not only is Hanergy in a bubble at 15 times its NTAV, but most of the NTAV depends on its parent group not defaulting. The listed company pays its parent in advance, but gets paid in arrears, heavily supporting its parent.


Bloomberg reported that shorting of speculative shares can horribly backfire:


Short sellers bowed out on Hanergy Thin Film Power Group Ltd. at just the wrong time.
Wagers against the Chinese solar-panel maker fell to 3.1 percent of its outstanding shares on Monday, the lowest level since December 2013, just before the stock slumped 47 percent in 24 minutes on Wednesday in Hong Kong to erase about $19 billion of value. Short interest dropped from 2014’s high of 5.1 percent, data compiled by Markit Group Ltd. show, as bears capitulated amid a 162 percent gain in the stock this year.

“Those who shorted Hanergy in the past got squeezed because it kept going up,” Andrew Sullivan, head of sales trading at Haitong International Securities Group, said in Hong Kong. “While there was a wall of money supporting the stock, it was very difficult to short.”

1MDB accounts "are audited by an international firm" (2)

In the previous blog post on this subject I wrote about the pretty bad state of audits, even if performed by the "Big Four" companies.

But how would the situation be if an audit company is warned in detail about possible fraud or other financial irregularities, surely auditors will step up their game, zoom in on the situation at hand and give a proper report?

According to short seller Carson Block the answer is an astonishing "no".

In "Beware the false reassurance of corporate probes" (free registration might be required) published by the Financial Times he writes (some snippets):


When it comes to defending themselves against accusations of wrongdoing, management teams and their complacent boards follow a well-worn routine. Their immediate reaction is to issue a blanket denial and announce that an independent committee of directors will investigate the accusations. The committee duly appoints an independent law firm to oversee the investigation, and the consulting arm of a Big Four accountancy to pore over the books.

Too often, such investigations are worthless endeavours that lead to more pain for investors. Frequently, companies are exonerated by their boards but subsequently tumble into bankruptcy or announce earnings restatements or evidence of other serious problems.


Directors are not inclined to embarrass themselves by exposing serious problems that had long been under their noses. That would invite shareholder lawsuits, regulatory scrutiny and professional embarrassment.

Nor are they likely to relish the prospect of clashing with management when the chief executive is often the one who put them on the board in the first place. Board members may even be conspirators in the fraud. If they are based in China and have little connection to the US, they are unlikely to face prosecution.

Time and again, investigators report that they have found no evidence to support claims of wrongdoing. The question that investors need to ask themselves is: how hard did these investigators look for clues that might have revealed something was amiss?

The firms hired to support the probe are often given a deliberately narrow brief. For example, there might be tight restrictions on the investigators’ ability to investigate the sources of the company’s cash balances.

Fraudsters have repeatedly duped independent committees and their advisers by showing that they control large cash balances. Often, they do this by borrowing the funds. If directors make it impossible to detect such ruses by limiting investigators’ access to evidence, nobody knows; the entire process is shrouded by the cloak of attorney-client privilege.

Accounting firms are also rife with conflicts of interest. Their main line of work is auditing public companies. This makes them unwilling to heap embarrassment on management teams and boards. To do so would be bad for business.


That doesn't sound that promising. Block gives a concrete example:


In 2011, Sino-Forest Corporation, a China-based company listed on the Toronto Stock Exchange that Muddy Waters had accused of falsifying its revenue, spent approximately $50m on such an investigation, hiring PwC as a consultant. The result was a clean bill of health. In a press release announcing the completion of the investigation, the independent committee said the company was unequivocally “not the ‘near total fraud’ and ‘Ponzi scheme’ as alleged by Muddy Waters . . . Sino-Forest is a real company.”

Unfortunately, investors who bought Sino-Forest bonds following the committee report saw their prospects for recovery plunge when the company declared bankruptcy four months later.


The problem is not confined to emerging markets. In the US, numerous independent board investigations have issued clean bills of health, only to be proved wrong later on.

A report into wrongdoing at Enron, carried out by a law firm hired by the company, was later described as “a whitewash” by an Arthur Andersen investigator. When Global Crossing ordered an investigation into allegations levelled by a former employee, the report came back clean. Yet the company fell into bankruptcy and settled with the SEC over an accounting scandal.


The solution according to Block:


Boards that truly want transparency should stop hiring law firms to conduct these investigations in private and under legal privilege, and open their work to genuine scrutiny.


Hopefully 1MDB will follow this advice for increased transparency, it is long overdue.