Gaoxian trading halts: a poser

By LYNETTE KHOO


CHINA Gaoxian has joined the string of S-chips that have seen trading of their shares either halted or suspended. While investors are still anxiously awaiting news from the company, speculation is rife on what could have possibly happened. Investor fears stem from accounting irregularities at some China-based firms listed in Singapore.

Being able to pass muster under a different regulatory regime doesn't necessarily mean that all's well for a company, except to say that things look okay on paper.

In the absence of full information, a trading halt is justifiable to ensure a level playing field. But a pertinent question to ask is why the textile firm has chosen to halt trading of its Korean Depository Receipts (KDRs) one day after the start of its share trading halt in Singapore on Tuesday.

In fact, it had to take a query from the Singapore Exchange (SGX) to China Gaoxian on the unusual trading activities of its shares on Monday to prod the company into requesting a trading halt here for the purpose of 'investigating the matters prompting SGX's queries'. By then, the Singapore counter had already fallen by a staggering 24 per cent on that day alone to 19 cents, after some 140 million shares changed hands.

Whether the drastic stock movement suggests that some punters were trading on information not yet made public is anyone's guess. But in the meantime, China Gaoxian's KDRs in Korea, which fell only 1.1 per cent to 4,895 won on Monday, slipped a further 14.9 per cent to their lowest level at 4,165 won on Tuesday. This translates to 23 cents since one KDR represents 20 shares.

This raises the question of why the trading halts were not carried out simultaneously on both exchanges. Pending the release of potentially material information, some shareholders trading KDRs on Tuesday could be acting on incomplete or inaccurate information; or worse, some could be trading on insider information.

While no notices have surfaced yet of changes in substantial shareholdings, it would be interesting to await news of whether such transactions took place this week. Such disclosures, if any, will likely be subject to scrutiny.

Understandably, investors haunted by memories of troubled S-chips with accounting irregularities might harbour worries over China Gaoxian pending the release of information.

Earlier this month, SGX queried the group on its unaudited financial results for the year ended Dec 31, seeking clarity on the significant decrease in trade and other receivables and the rise in bank loans despite a significant jump in cash balances. In response, China Gaoxian explained that cash sales made up a larger proportion of total sales in fiscal 2010 than in fiscal 2009.

Receivable turnover days also decreased significantly as exceptionally strong demand in the fourth quarter prompted customers to pay on cash terms to secure the price and supply of products, and the group has tightened credit terms to strengthen cash position, it said.

Justifying the rise of short-term loans amid abundant cash balances, China Gaoxian said it converted bills payable balance to short-term loans to support banks in meeting their loan quota as 'it is in the interest of the group to maintain close and mutually beneficial relationship with its PRC banks'.

For shareholders not satisfied with the group's responses to the SGX queries, they had ample time to act on their shareholdings before the Tuesday trading halt. Those who have chosen not to make an exit will just have to bite the bullet and hope that investor fears will prove unfounded.

As the trading halt cannot exceed three market days unless it is converted to a trading suspension, China Gaoxian probably has to shed some light on material developments by today.

It would be surprising if the disclosure throws up any accounting issues at China Gaoxian, which was listed in September 2009 and has recently gone through another round of scrutiny by the Korean Exchange in its dual-listing undertaking. But should the news turn out to be negative, it would perhaps serve as a wake-up call for shareholders that they should not take dual-listing as a guarantee of a company's health.

After all, being able to pass muster under a different regulatory regime doesn't necessarily mean that all's well for a company, except to say that things look okay on paper.

Hopefully, the S-chips cluster will not have to cope with yet another shock, as that would mean that the uphill battle to regain confidence and trust will only get tougher.

S-chips in hot seat in latest AGM season

MANAGEMENTS of most companies are probably up to their necks right now preparing for their respective annual general meeting (AGM), a time when companies are often inundated with tough questions, and sometimes feisty shareholders.

Notably, this season could prove to be significantly more stressful for companies with exposure to Japan and the Middle-East as prospective AGMs are likely to be marked by a spike of earnings-related questions following Japan's nuclear scare and Libya's unrest as the events remain vividly imprinted on the minds of shareholders.

However, bearing the main brunt of shareholders' fury would probably be the management of Chinese counters, otherwise known as S-chips.

Shareholders of S-chips are likely to leave no stone unturned during this timely 'firing' session following the recent spate of accounting irregularities at China Gaoxian, China Hongxing and Hongwei Technologies.

Last week, China Gaoxian disclosed that its auditors Ernst & Young could not verify or confirm the bank balances for its two Chinese subsidiaries for the fiscal year ended Dec 31, 2010.

Likewise, auditors at China Hongxing and Hongwei Technologies were unable to finalise their audits for the last financial year as they too could not ascertain certain cash balances.

With S-chips now in the hot seat, analysts advise shareholders to always scrutinise the balance sheet of respective companies before investing in them. They highlight potential red flags that could lead to possible issues include companies purportedly reporting huge balances of cash but yet withhold dividend distribution in the absence of any significant acquisition trail.

But perhaps one should not be quick to conclude that birds of a feather flock together?

Soh Chun Bin, partner at Stamford Law Corporation, said: 'Investors should be prudent when it comes to investing in S-chips. But when a blow-up happens, investors should not be too quick to judge its remaining peers as there are legitimate reasons to hold on to cash.'

For one, saving for a 'rainy day' could be one of the reasons why companies hoard cash. After all, it is widely known that companies in net cash positions better weather the stormy conditions during downturns.

That said, shareholders should not shy away from asking management whether the company's cash is safely stored in established and reputable financial institutions and undergo proper audit procedures.

In addition, it is also good to pay attention to a company's debt maturity profile and plans for subsequent debt financing.

But should shareholders be only jotting down questions pertaining to potential accounting irregularities?

Let us revisit the China Gaoxian case again.

As a result of its auditors not being able to verify the bank balances of its subsidiaries, China Gaoxian shares have been suspended from trading since Tuesday last week.

However, prior to the trading halt, the counter had plummeted more than 20 per cent the previous day on abnormally high volume.

Could this potentially point to an asymmetry in information distribution?

In general, sophisticated investors and institutional investors do not attend AGMs as they typically secure all the requisite information they need from management or the company's respective investor relations company or staff directly.

Ideally, disclosures should be made fairly to all, be it to a majority shareholder or a shareholder that holds just one lot.

Sadly, this would be hard to achieve in reality as institutional investors remain updated by companies throughout the financial year and have the liberty to pose questions at their will.

On the flip-side, retail investors are only entitled to the once-a-year session to voice any concerns that they might have.

Basically, nothing is really fair in this world.

Our advice? On top of preparing a list of questions to dart at management, skip breakfast and go enjoy the plethora of gastronomic delights offered during an AGM, compliments of the company.

S-Chip With High Net Cash Versus Market Cap

CHINA HONGXING: Things are not as bad as they appear?

Written by The NextInsight Team Thursday, 24 March 2011 00:50

AN ARTICLE in the current edition of The Edge Singapore, quoting several sources, suggests that the widely-held worry over possible serious accounting issues or missing cash at China Hongxing is not quite justified.

“China Hongxing has cash. The boss is very rich,” says a source, referring to the Wu family which owns 33% of the company whose trading on the Singapore Exchange has been suspended since Feb 25.

“It’s probably a serious corporate governance issue linked to the behavior of its majority shareholders,” added the same source.

Another source told The Edge Singapore: “Given their character, they are not the type to misappropriate funds.” The company represents the primary business interest of its controlling shareholders.

“They have a small personal business, a wine bar in Xiamen. But they don’t have to use China Hongxing’s funds because they themselves are rich.”

Wu Rongguang, chairman of China Hongxing. Photo: annual reportKelvin Yeung, CFO of China Hongxing, hints that the problem might lie in the amount of information requested by the newly-appointed auditors, Ernst & Young, versus what the company was willing to disclose.

“This is their first year, so they asked for more information than normal,” he told The Edge Singapore.

“We provided whatever information they needed that is relevant. We haven’t withheld relevant information. We tried our best to give them information they requested.”

A CFO of another company, who has worked for the Big Four auditing firms before, says the auditing process and methodology is the same for big and small accounting firms.

“But there is more red tape in a Big Four firm. For example, if there is an audit issue, it is subject to review by more partners. Some of these issues may be technical issues that are not serious, such as the accounting treatment of certain items.”

China Gaoxian scandal evokes chilling parallels

Mar 26, 2011
NEWS ANALYSIS

China Gaoxian scandal evokes chilling parallels

Similarities with FerroChina scandal in 2008 a scary reminder to stay vigilant
By Goh Eng Yeow, Senior Correspondent
China Gaoxian founder Cao Xiangbin sold 60 million shares at the point of listing.

IT MAY look like just another S-chip train wreck, but the accounting irregularities raised at textile maker China Gaoxian are far more worrying.

While China Hongxing Sports and Hongwei Technologies, which both reported accounting problems last month, listed more than five years ago, China Gaoxian made its debut only 18 months ago.

This makes this latest S-chip scandal all the more serious, because China Gaoxian listed six months after clean-up measures were implemented following a spate of earlier S-chip irregularities.

As one of the biggest IPOs of 2009, China Gaoxian was supposed to flag an all-clear signal to investors that it was back to business as usual for S-chips.

After all, its independent directors included Mr Philip Chan, a former listings head with the Singapore Exchange.

In January, China Gaoxian rode high on a strong vote of investor confidence to raise $240 million from South Korean investors after getting its stock sponsored as a depository receipt listing in Seoul.

So its trading suspension this week is a big blow to the already tarnished S-chip sector and may sound the death knell for similar fund-raising exercises by other S-chips in Seoul.

It is also worth noting the interesting parallels between China Gaoxian and steel-coil maker FerroChina, which was suspended from trading more than two years ago.

Just to jolt the memory, FerroChina was also riding high with investors when it suddenly closed shop in October 2008, purportedly because banks refused to roll-over its short-term loans.

But as some traders noted, the warning signals had been there for years, if anyone had cared to look.

Company insiders had been whittling down their stakes, selling about 155 million shares, or 18 per cent of the company, between 2005 and 2008.

And as a company purportedly sitting on a huge cash hoard, it had short-term debts of 2.33 billion yuan, with banks taking literally everything - bank deposits, inventories, buildings - as collateral for their loans.

Now take a look at China Gaoxian and one will notice more than a passing resemblance to FerroChina.

The company's 2009 prospectus showed that executive chairman and founder Cao Xiangbin sold 60 million shares at the IPO issue price of 26 cents apiece at the point of listing.

A year later when the lock-up period ended for major shareholders, Carry Luck, a company owned by one Mr Hong Rong Zhi, lost no time in selling out too.

In just two days last September, Carry Luck sold 53 million shares at 19.5 cents apiece and another 25.1 million shares at 19 cents each - both well below the 26-cent listing price.

The sales took Carry Luck's stake to 4.99 per cent from 10.42 per cent.

Another telling sign: the company had raised $78.2 million from its IPO here in 2009 and another $223.8 million from selling 600 million new shares in Seoul in January.

Yet, like FerroChina, it had behaved like a cash-strapped firm, asking customers to pay up in cash and drawing down on its bank credit lines.

It was this contradiction that prompted the SGX to put a query to the company.

In hindsight, investors should have asked why China Gaoxian needed to raise so much cash over such a short period if its growth was self-sustaining. And what happens to that huge sum now? Is it still in the company's coffers?

And shouldn't a question have been asked about the huge sales of China Gaoxian stock by a major shareholder last September, at below the IPO issue price?

It is strange that irregularities could surface at China Gaoxian with FerroChina scandal still fresh in investors' minds. And it is a chilling reminder to all investors to stay vigilant at all times.

engyeow@sph.com.sg