23-07-2012, 10:30 PM
China Hongxing Sports released their Special Auditor report tonight.
http://info.sgx.com/webcoranncatth.nsf/V...400417B22/$file/Executive_Summary.pdf?openelement
It makes a good read. Probably this can be a good platform for us to discuss on possible "financial shenanigans" and hopefully, we are able to extrapolate it usefully to other listed stocks (which we may have or may not).
Some key notes from the Hongxing saga:
1. Original cash holding (RMB1.4 billion) was understated by an approximate RMB1.15 billion!
..Of this discrepancy, RMB335m was paid to distributors to avoid closure + to incentivise opening of new stores
(Note: Isn't this very very familiar? If a product is truly sellable, why do they need to provide such incentivise. In another perspective: Apple resellers are even willing to suffer low margins just to sell apple products)
..RMB467m due to increase in other receivables to the same distributors.
(Note: An investor always worries about surging trade receivables. Knowing this, a fraudster will not necessarily ramp out A/Rs to make it so obvious. Perhaps, we should pay smiilar attention to other receivables + RPTs as well?)
2. Financial statements consolidation was done mainly from transactions + documents obtained from the CEO's office directly; instead of their respective finance departments. Daily operations were also largely handled & supervised by the CEO's office. Throughout the report, it was continuously being emphasized that autonomy was vested in one single player - the CEO.
3. Some aggregate RMB887m was made for Expansion Expenses - well beyond the designated RMB750m budget & without any prior approval of the CFO. There were also other expenses incurred without any adequate/proper approval (from CFO).
Out of the above 3 pointers, it is hard to distinguish 2 & 3. For 2, it might prove to be good if there is an insider who is working in the company and might have a good sense of how the corporate environment is like. However, an investor can always pick out red flags from pointer 1. And if there are no valid reasons to reason the doubts, it might be better to give the company a miss.
P.S. It might be interesting to take a look at Hongxing's past annual Financial Notes to see if pointer 1 can be flagged out.
http://info.sgx.com/webcoranncatth.nsf/V...400417B22/$file/Executive_Summary.pdf?openelement
It makes a good read. Probably this can be a good platform for us to discuss on possible "financial shenanigans" and hopefully, we are able to extrapolate it usefully to other listed stocks (which we may have or may not).
Some key notes from the Hongxing saga:
1. Original cash holding (RMB1.4 billion) was understated by an approximate RMB1.15 billion!
..Of this discrepancy, RMB335m was paid to distributors to avoid closure + to incentivise opening of new stores
(Note: Isn't this very very familiar? If a product is truly sellable, why do they need to provide such incentivise. In another perspective: Apple resellers are even willing to suffer low margins just to sell apple products)
..RMB467m due to increase in other receivables to the same distributors.
(Note: An investor always worries about surging trade receivables. Knowing this, a fraudster will not necessarily ramp out A/Rs to make it so obvious. Perhaps, we should pay smiilar attention to other receivables + RPTs as well?)
2. Financial statements consolidation was done mainly from transactions + documents obtained from the CEO's office directly; instead of their respective finance departments. Daily operations were also largely handled & supervised by the CEO's office. Throughout the report, it was continuously being emphasized that autonomy was vested in one single player - the CEO.
3. Some aggregate RMB887m was made for Expansion Expenses - well beyond the designated RMB750m budget & without any prior approval of the CFO. There were also other expenses incurred without any adequate/proper approval (from CFO).
Out of the above 3 pointers, it is hard to distinguish 2 & 3. For 2, it might prove to be good if there is an insider who is working in the company and might have a good sense of how the corporate environment is like. However, an investor can always pick out red flags from pointer 1. And if there are no valid reasons to reason the doubts, it might be better to give the company a miss.
P.S. It might be interesting to take a look at Hongxing's past annual Financial Notes to see if pointer 1 can be flagged out.