China Hongxing Sports

[Musicwhiz]

Trouble brewing for this Company and its shareholders......

Feb 26, 2011
China Hongxing to probe irregularities
By Jonathan Kwok

China Hongxing Sports announced last night that it is appointing a special auditor to examine its affairs after uncovering financial irregularities.

Trading in the company's shares has been halted since Tuesday afternoon after the stock plunged 17.9 per cent earlier that day.

China Hongxing said Ernst & Young auditors told its audit committee that irregularities had been noted in the cash and bank balances, accounts receivables, accounts payables and other expenses during the audits of subsidiary companies in China. The subsidiaries are Fujian Hongxing Erke Sports Goods and Quanzhou Hongrong Light Industry.

Ernst & Young will not be able to give audit clearance for the financial results for the year ended

Dec 31 without performing additional procedures and tests, said China Hongxing.

'The auditors also recommend that the audit committee immediately commence a fact-finding process to verify such irregularities.'

China Hongxing said the independent special auditor will be appointed by next Tuesday. It will conduct a thorough investigation and produce a report.

'The board has also authorised the audit committee to oversee the investigation and take any further actions as they deem fit. The special auditor will report to the audit committee and the Singapore Exchange (SGX).'

In the meantime, the audit committee will take steps to safeguard company assets and continue operations smoothly, the announcement added.

China Hongxing will apply to the SGX for an extension to announce its full financial year statements for 2010 as it will not be able to make the announcement by the March 1 deadline.

The company has appointed KhattarWong as local legal advisers. China Hongxing also said in yesterday's announcement that it will apply to convert the share trading halt to a trading suspension.

[lonewolf]

Another darling S-chips hit the negative spotlight.

Its hard to be positive about the S-chip companies when we keep seeing s*** hitting the fans. From an investor's prospective, this cannot be good for S-chips companies as there will always be that doubt about whether the books is cooked.

And if you think about it, good S-chip companies are in a catch-22 situation. Report good numbers and there is doubt on its validity. Report poor numbers and you are condemned.

For the sake of my sanity, I think I would just ignore the entire S-chip sector for now.

[Musicwhiz]

For the sake of my sanity, I think I would just ignore the entire S-chip sector for now.

Yep, I agree with this advice. My portfolio currently contains no S-Chips at all.

[corydorus]

Strong advocates of no S-Chip for years. We can't value something if we constantly need to doubt the book.
The core fundation on value investment.

Something need to be change significantly to bring strong accountability into the system. Currently i feel too many entity profits from S-chip listing to do otherwise.

This has happen to many stock exchanges. I see pattern of frauds or poor performances. Ever wonder why China properties went up so high , money flow like water ? Any correlation with all those Ex-CEOs swindlered money from around the world stock exchanges putting their cash there ?

Cory

[Kion]

when in doubt, dont put your money in

[VestedInterest]

Agree that it is best to avoid S-chips, especially the small to mid-cap ones. There are just so many other good bargains in the market currently that it really is not worth the risk. Obvious too that the good coys go to HK while the second and thrid rated ones end up in SGX.

[Musicwhiz]

Mar 2, 2011
NEWS analYSIS
Red flags for China Hongxing
Sudden departure of its auditors last year an early sign
By Goh Eng Yeow, Senior Correspondent

A SIMPLE rule of thumb: It's time to get at least a little worried when a company's auditors are replaced.

Take the case of former market darling China Hongxing Sports, which last Friday appointed special auditors after uncovering irregularities.

Investors could have taken heed of warning signals even before the counter was forced to apply for trading suspension of its shares last week owing to possible accounting irregularities.

Chief among these red flags was the sudden resignation of its auditors in October last year, as well as a huge jump in the firm's trade receivables - money owed by customers for goods delivered to them.

The Singapore market is reeling from a fresh round of jitters over the reliability of mainland China firms listed here, known as S-chips, with a second firm - Hongwei Technologies - also raising accounting worries, this time last Saturday.

One key question over China Hongxing surrounds the departure of the company's former auditors, RSM Nelson Wheeler and Foo Kon Tan Grant Thornton LLP, in October. They had been the company's joint auditors since it was listed in 2005.

Only six months earlier, the company's annual report stated that they were willing to be reappointed.

'Should investors be satisfied with a one-line statement that the auditors had no disagreement with the board on accounting treatments for the financial year ended December 2009 and that there were no matters of concerns to be brought up to the audit committee?' trader James Chen asked.

NRA Capital executive chairman Kevin Scully noted that China Hongxing's board had issued a negative assurance which had accompanied the release of its third-quarter results in November, to say nothing had come to its attention which might render the nine-month results 'to be materially false or misleading'.

'Did the board try to probe more deeply before issuing the negative assurance, considering that there was a sudden change of auditors? Did they try to get a more detailed explanation on why the existing auditors resigned?' he asked.

As it turns out, there had been plenty of warnings flagged by other analysts over the very question of a sudden change of auditors in a listed firm.

In September 2008, just months before a string of accounting scandals hit the S-chip sector, JP Morgan warned that a rapid switch of auditors was a red flag that all might not be well with an S-chip.

'Based on our experience in Asia, most auditor replacements are related to unsettled disputes on accounting practices.'

In China Hongxing's case, newly appointed auditors Ernst & Young told the firm's audit committee on Feb 22 that it had uncovered irregularities at the company's units Fujian Hongxing Erke Sports Goods and Quanzhou Hongrong Light Industry.

The company has since appointed nTan Corporate Advisory as its independent special auditors to conduct a thorough probe on the issues raised by Ernst & Young.

Another key question raised by some traders is the near doubling in China Hongxing's trade receivables to 684.6 million yuan (S$132.5 million) at Sept 30 from 363.4 million yuan a year earlier.

The big jump in trade receivables came even as the company's payables - the money it owed to suppliers for goods it received - was only 174 million yuan.

In other words, plenty of goods were going out the factory door but not that much in the way of components and the like were coming in the door.

Question marks over trade receivables had also been a red flag at other S-chips such as China Sun Bio-chem and Sino-Environment, which had also faced accounting irregularities.

But some traders noted that China Hongxing's fall from grace could be traced to as far back as 2-1/2 years ago, when the company disclosed the sale of a big chunk of shares by then substantial shareholder JF Asset Management - a sloppy five months late.

Pressed for an explanation, the company said it had not received any fax notifications on the sales, even though JP Morgan Asset Management, which owned JF, released details which showed that it had notified China Hongxing by fax within two days of each sale.

The most serious issue is that the collateral damage all this inflicts on retail investors is very painful, considering that the counter was once a major favourite S-chip with a market value of almost $4 billion when it reached a record high of $1.42 a share in October 2007.

In the past two years, its share price had crashed to only 11.5 cents before trading of its shares was halted last Tuesday, with questions emerging over its reluctance to pay a big dividend to shareholders despite sitting on a huge cash hoard.

engyeow@sph.com.sg

[d.o.g.]

I believe hongxing does pay dividends. Having said that, Hongxing teaches us a lesson that even though dividends are paid, money might still be phantom.

The key is not whether a company pays dividends, but rather what it would cost the promoters to create the dividends out of thin air if the business was fake.

In the case of China Hongxing the IPO raised RMB 191m, and a further RMB 503m was raised from selling convertible bonds which were subsequently all converted. Total cash inflow was RMB 694m.

Dividends actually paid out were:

2006: RMB 24m
2007: RMB 81m
2008: RMB 104m
2009: RMB 28m
9M10: RMB 28m

Total: RMB 175m

However the Wu brothers own about 33% of the company so only about 2/3 of this amount actually went to minority shareholders i.e. RMB 118m went to non-insiders.

We know RMB 694m went in, and RMB 118m came out. So there was more than enough money raised from the IPO and CBs to pay out dividends to minority shareholders. The RMB 576m balance would have been available for whatever purposes the Wu brothers deemed fit. Apparently, sharing some of this bounty with their auditors in exchange for their blessings was not one of these purposes...

[isaac]

I believe hongxing does pay dividends. Having said that, Hongxing teaches us a lesson that even though dividends are paid, money might still be phantom.

The key is not whether a company pays dividends, but rather what it would cost the promoters to create the dividends out of thin air if the business was fake.

In the case of China Hongxing the IPO raised RMB 191m, and a further RMB 503m was raised from selling convertible bonds which were subsequently all converted. Total cash inflow was RMB 694m.

Dividends actually paid out were:

2006: RMB 24m
2007: RMB 81m
2008: RMB 104m
2009: RMB 28m
9M10: RMB 28m

Total: RMB 175m

However the Wu brothers own about 33% of the company so only about 2/3 of this amount actually went to minority shareholders i.e. RMB 118m went to non-insiders.

We know RMB 694m went in, and RMB 118m came out. So there was more than enough money raised from the IPO and CBs to pay out dividends to minority shareholders. The RMB 576m balance would have been available for whatever purposes the Wu brothers deemed fit. Apparently, sharing some of this bounty with their auditors in exchange for their blessings was not one of these purposes...

Hi d.o.g. ,

would u care to comment on my assessment on the fishy low interest earnings for Dapai?

If we were to look at just 2 other companies; Eratat and China Hongxing:

China Hongxing apparently had a cash hoard of RMB 2,833,009,000 and had interest earnings of RMB 6,405,000 for the 6 months ended 30/6/2009. That's 0.45% annualised interest.
Eratat apparently has a cash hoard of RMB 159,319,000 and had interest earnings of RMB 154,000 for the third quarter. That's 0.04% annualised interest.

Is there really something fishy, or is my overactive mind thinking too much?

[corydorus]

Agreed and as I mention earlier the worst s-chips are those that kill you slowly.

Giving dividend gimmick , naming their stock "China xxx", renaming their stock, bring in BBs, good future stories, stock price slip slowly etc they can be in one or more.

These maybe delay/attract tactics symptoms I believe (or maybe just coincident)...Those that tend to take short-cut, I am sure after they read this will think of new ways.
So is very hard to tell who is real. BB themselves get screwed too.

I will avoid them altogether. Rather miss this class of opportunity than lose. There are so many opportunities out there anyway.

Cory