China Gaoxian

[Musicwhiz]

Perhaps the worst for China Gaoxian's shareholders has just happened.....
http://info.sgx.com/webcoranncatth.nsf/V...D003A4F16/$file/Announcement_24Mar11_.pdf?openelement

External auditors E&Y could not verify the company's bank balances (part of the RMB1061.7m cash & cash equivalent) as at 31Dec10. Is the CEO Cao Xiangbin (曹祥彬) a crook? Is the CFO Raymond Wong a joke? Who are the thieves who took the company's money in the bank accounts?

The funniest thing is that just in Jan11 China Gaoxian managed to raise $223.8m (net proceeds) in new capital via a KDR issue (30m KDRs; or 600m new shares) sponsored by Daewoo Securities!

How can the professional bankers, lawyers, reporting accountants, and SGX review/surveillance officers, let crooks so easily penetrate the defense system safeguarding Singapore's public equity capital market??!!

I think the Singapore authorities must act now to change/correct the system in order to uphold its integrity and market confidence. All those wrong-doers should be put to jail!

I totally agree with you on this! It's simply amazing how not 1, not 2, but THREE S-chips have gotten into trouble in just a span of a few weeks! And if one can say that China Hongxing and Hongwei did not undergo extensive due diligence prior to their suspensions, at least China Gaoxian (supposedly) did! But still, look what has happened!

I really feel for the aggrieved shareholders for Gaoxian, who are left holding the baby when massive fraud has been committed. Perhaps the aim of raising the monies in Korea was because the cash was missing in the first place, so they needed the capital to just continue operating for another 2 more months (Jan 11, 2011 till now) before the auditors came around.....

All I can say is - this is simply and terribly disgusting and heart-wrenching, and SGX and SIAS had better take some drastic action soon before things get really worse. Who knows which other S-Chips or companies are hiding behind a veil of supposed righteousness and reporting fake cash balances?

I'v just did a search and found an article by Ernest Lim, who claimed to be a shareholder (not sure if he still is ?) . I guess quite a lot of people got cheated.

Ernest Lim was featured on NextInsight as well, and has written quite a few articles and analyses recommending S-Chips and promising China stocks. I am not sure if many did indeed follow his calls, but apparently one should always do their own due diligence and ask many piercing questions before one takes the plunge. So I guess those who followed did so (assumingly) with eyes open!

[belgarathc]

Somehow I managed to sell Gaoxian just before their Korean listing.

It's still kind of worrying though as I still hold a bit of china shares like China Sunsine and Qingmei.

[dydx]

After Hongwei & Gaoxian, i think people should avoid China Textile shares altogether and they do not have much time left to act.

I guess you can't say all PRC-based textiles or related products companies listed on SGX are run by crooks. Obviously, this can't be true!

For those who own such counters, to just sell away their shares indiscrimately without first doing some investigations to verify the actual situation and risks, is one sure way to destroy their wealth.

To avoid such landmines, one effective way is that investors should check and verify - and be totally satisfied with - the character and background of those people running the business, before investing.

[Nick]

S Chips are high risk stocks...if they are not backed by any SWF or SOE, just be very careful.

(Vested in one S Chip)

[Musicwhiz]

S Chips are high risk stocks...if they are not backed by any SWF or SOE, just be very careful.

(Vested in one S Chip)

I know SWF = Sovereign Wealth Funds. But what is SOE? State-Owned Enterprise?

[Nick]

S Chips are high risk stocks...if they are not backed by any SWF or SOE, just be very careful.

(Vested in one S Chip)

I know SWF = Sovereign Wealth Funds. But what is SOE? State-Owned Enterprise?

Yes...you are right. SOE = State Owned Enterprise.

These are the A-list companies in China and they list out their children in different stock exchanges in the world. In general, these listed companies are headed by employees of the SOE (rather than a single controlling executive shareholder) and enjoy large moats. A good example is Cosco Singapore or even CM Pacific. CAO was a SOE linked coy which almost collapsed but to prevent a loss of face, they saved it and today it is still trading and profitable.

So there is a two-fold protection -

i) Support from PRC Govt + high moats + unlikely for power to concentrate on 1 person.
ii) If fraud occurs, SOE may save it.

Of course, nothing is set in stone so these are just useful guidelines.

[lonewolf]

I think this episode is a validation of my approach to just avoid the entire S-Chips universe altogether.

And wealth destruction or not, sometimes one has to take drastic action in the face of 'guilt by association'. I feared another sell-down for the S-chips tomorrow.

Of cos not every S-chips in SGX are fraudulent with cooked books and littered with landmines. And you may have a gem of a s-chip counter. But if you can't trust the book, how do you know its an gem in the first place?

2 things was striking from some of the posts:

#1 - for those who continued to bash SGX on its decision to allowed questionable Chinese companies to be listed in Spore, perhaps the same thing can be said about the Korean stock exchange. I do not believe the regulators, bankers, accountants of both countries are sleeping on the job; but it goes to show that trust is implicit and if you cannot trust, you cannot judge.

#2 - Ernest Lim is a Chartered Financial Analyst, as well as, a Certified Public Accountant Singapore. He of all people is more qualified than many of us here to make sense of the company's account. Yet he was also hookwinked. Why? Same issue. If you trust the book, why would you not believe in the company? Perhaps more importantly, and I said it before for any analyst report. Its not difficult to put a particular spin to your report. And even though I just has a causal scan on what he says about GaoXin, the spin was almost too blatant eg. aggressive CAPEX signifies confidence. Of cos he's not the only one guilty of such blatantness. You see that even in this forum.

---

S Chips are high risk stocks...if they are not backed by any SWF or SOE, just be very careful.

(Vested in one S Chip)

Nick, I just have to ask. Is your S chip backed by a SWF or SOE.

[Musicwhiz]

And even though I just has a causal scan on what he says about GaoXin, the spin was almost too blatant eg. aggressive CAPEX signifies confidence. Of cos he's not the only one guilty of such blatantness. You see that even in this forum.

I read Ernest's analysis of Gaoxian, and I have to say that "aggressive capex signifies confidence" is not exactly a trait which I can agree with. The fibre industry (as described in detail by d.o.g. some time back in another thread) is full of ups and downs as demand and supply moves up and down. During times of hige demand, ALL players quickly ramp up production and "aggressively" start producing in anticipation of the demand. Gross and net margins are high as a result.

But once the increased supply comes on-stream and demand tapers off, the unsold inventory will pile up and the huge depreciation expenses will wipe out most of the early profits and cause many companies to go into the red. If a company does not manage its cash cycle well, they could end up in serious poo.....so high capex and zero dividend may, on the surface, signifiy a "growth" stock, but one has to be very aware of the business model and industry characteristics before taking the plunge. In other words, study the business intimately and go through all details (both quantitative and qualitative) with a fine-tooth comb.

I think most of the forumers here are pretty objective in their views on certain companies, even if they are vested.

Speaking for myself, I regularly criticize certain Management moves made by the companies I own as well, as one has to believe that Management does not ALWAYS make the right moves and sometimes they might do something which destroys rather than enhances shareholder value, by mistake. Just as I questioned Boustead's exposure in Libya, and MTQ's purchase of 200 million shares in Neptune Marine Services. I think everyone in the forum should strive to be as objective as possible, even though I am aware one cannot be 100% objective if one is vested.

[dydx]

It is not good enough to just "trust the book", especially for non-blue-chip companies. It is better/safer to first assess/judge the maker of the book (i.e. the unaudited/audited accounts) and be happy with his characterter and professional competence, before accepting the book and judging the numbers in it.

It is equally important to check and verify the character and background of the key people running the business, and only accept the business if one is happy with the character, reputation, and integrity of the people involved. Of course, the economic characteristics and risks of the business are equally important as well.

[Nick]

S Chips are high risk stocks...if they are not backed by any SWF or SOE, just be very careful.

(Vested in one S Chip)

Nick, I just have to ask. Is your S chip backed by a SWF or SOE.

I did mention that I am vested in China Minzhong in its thread.

Based on its IPO prospectus, the GIC has a 16.5% stake in China Minzhong.