FibreChem fiasco seems to have led companies to be more careful in their statements, especially numbers
By TEH HOOI LING 28 February 2009
Last week in this column we asked the question: Is the cash really there, especially for the S-chips. As if on cue, FibreChem Technologies suspended the trading of its shares this week. The reason: The board of directors said that the company and its auditors had encountered certain difficulties in trying to finalise the audit of the group’s trade receivables and cash balances as at Dec 31, 2008.
FibreChem added that executive chairman and chief executive James Zhang has offered to resign from his positions with immediate effect and has also offered to cooperate fully with the board.
The board of directors added that nTan Corporate Advisory was being appointed as the independent investigator and financial adviser ‘to carry out a thorough and comprehensive investigation into the transactions in question and to advise on the appropriate measures to be adopted by the group to safeguard its assets, continue its operations smoothly and enhance values to all its stakeholders’.
Before the sub-prime crisis dragged the whole world down with it, FibreChem had been one of the shining stars among the S-chips. Mr. Zhang was described as a visionary, having steered FibreChem from a producer of polyester differential fibres to being China’s pioneer in microfibre synthetic leather which is comparable to deer hide.
Thanks to his efforts, FibreChem’s revenues soared from 475 million yuan (S$107.5 million) to 1.8 billion yuan between 2004 and 2007. During that period, net profits quintupled from 101 million yuan to 538 million yuan and its net margins expanded by nearly 50 per cent.
Those who have met Mr. Zhang said he showed an enthusiasm and passion in his trade that is so typical of many successful entrepreneurs.
Recounted an investor: ‘On our way to a recent lunch meeting, the enthusiasm showed by James was infectious, with him examining and feeling the texture of the wallpaper and the curtains along the hallway as we made our way to the luncheon room.’
The most recent financial statements of FibreChem did not throw up any suspicions as well. In its third-quarter results, the company reported an 18.5 per cent decline in net earnings to HK$120.6 million (S$24 million). Revenue was flat. Meanwhile, its operations generated cash of HK$300 million. Total cash and balances with banks amounted to HK$1.17 billion while bank loans came to HK$530.5 million.
As we all know, one criterion for bottom-fishing is when a good and profitable business trades below its cash holdings. But now, if we don’t even know if the cash is really there or not, then all bets are off.
FibreChem’s fiasco, and the pummelling of China Hongxing’s shares the week before, cast even darker shadows over all S-chips, and perhaps ironically even more so on stocks that have big bank balances.
If indeed a company’s market cap is less than its cash holdings, then the enormous pile of cash sitting in the bank can be too great a temptation for some to resist - especially in desperate times like now when many are in need of cash.
The market is now rife with rumours of which other S-chips have phantom cash. Particular suspect would be those which have a big cash pile but had not declared any dividends.
Investors’ aversion of S-chips is evident. Year to date, the Prime Partners China Index is down 20.4 per cent, compared with 9.8 per cent for the Straits Times Index.
Corporate governance issues aside, it is also a fact that as a whole S-chips are going through a lot more hardships than the other stocks listed on Singapore Exchange (SGX), particularly in the last quarter of 2008.
Of the 200 companies which have reported their fourth-quarter earnings as at Thursday, 43 are S-chips.
On every score that I look at, the S-chips as a group have fared worse than the other SGX-listed stocks.
There is a higher proportion of S-chips which are in the red in the fourth quarter than the rest: 42 per cent versus 37 per cent.
Some 63 per cent of S-chips recorded lower fourth-quarter revenue, compared with 54 per cent for the rest. And the quantum of revenue decline is much sharper for the S-chips. The median revenue decline of S-chips was 14.5 per cent. The corresponding figure for the others is a mere 2.9 per cent.
Meanwhile, just under 84 per cent of all S-chips reported lower earnings per share. This compared with 76 per cent for the rest. And again, the decline is much sharper for S-chips: 40 per cent compared with 20 per cent for the rest.
Sharp deterioration
The fourth-quarter results of S-chips which have made their filings showed that the business environment had deteriorated sharply in China in the last three months of 2008.
But fortunately for them, the pretty good results in the first three quarters provided a big enough buffer for the atrocious fourth quarter. Consequently, the full-year numbers of S-chips did not look as bad vis-a-vis the other stocks.
For example, for the whole of 2008, some 24.5 per cent of S-chips were in the red. This compared with 21.8 per cent for the rest of the market.
Meanwhile, the median change in full-year revenue for S-chips was actually a rise of 13.8 per cent - higher than the 7.2 per cent increase recorded by the non-S-chips.
As for the full-year earnings per share, the median decline chalked up by S-chips was significantly lower than the rest of the market: -3.2 per cent versus -11.9 per cent.
Of course, the market is forward looking, and the fourth quarter is a harbinger of what’s to come for the rest of 2009. Hence, the severe drubbing seen in S-chips of late.
Perhaps FibreChem’s fiasco had led companies to be more careful in their statements especially when it comes to numbers, or perhaps the business environment is changing so quickly that the companies didn’t have enough time to verify the exact number.
Or perhaps it is because of poor English. Whatever the case may be, the press releases and commentaries by China Sports and Changtian Plastic and Chemical definitely did not inspire any confidence in investors in these uncertain times.
In China Sports’ press release for its results released on Thursday, every number quoted was preceded by the word ‘approximately’.
‘As a result of strong demand for YELI branded products across the board, group revenue increased by approximately 54.1 per cent to approximately RMB1,859.7 million in FY08 from approximately RMB1,207.1 million in the financial year ended Dec 31, 2007.
FY08 gross profit was up by approximately 46.2 per cent to approximately RMB386.3 million from approximately RMB264.3 million in FY07.
‘Net profit after tax increased by approximately 19.2 per cent to approximately RMB184.9 million in FY08 from approximately RMB155.1 million in FY07.’
There were 39 ‘approximately’ in the 964-word article!
Similarly for Changtian, in its review of its performance, the company wrote: ‘Our revenue decreased slightly by approximately 0.8 per cent or RMB5.2 million from approximately RMB633.2 million for FY07 to approximately RMB628 million for FY08.’
‘Approximately’ was repeated 11 times in that one paragraph.
An analyst alerted me to the two examples above and quipped: ‘Are the companies trying to tell us something?’
Well, according to Google, an approximation is ‘an inexact representation of something that is still close enough to be useful’.
And according to firsttradenet.com, ‘approximately’ is a term used in letter of credit practice which allows a 10 per cent variance above or below the value, quantity of goods, or unit price specified.
Anyway, with so much inexactitude in their financial statements, pardon me if somehow, I’m not too convinced when China Sports ended its press release by saying: ‘Barring unforeseen circumstances, we are cautiously optimistic about our performance in FY09.’
1 comment:
Darker shadows hover over S-chips
FibreChem fiasco seems to have led companies to be more careful in their statements, especially numbers
By TEH HOOI LING
28 February 2009
Last week in this column we asked the question: Is the cash really there, especially for the S-chips. As if on cue, FibreChem Technologies suspended the trading of its shares this week. The reason: The board of directors said that the company and its auditors had encountered certain difficulties in trying to finalise the audit of the group’s trade receivables and cash balances as at Dec 31, 2008.
FibreChem added that executive chairman and chief executive James Zhang has offered to resign from his positions with immediate effect and has also offered to cooperate fully with the board.
The board of directors added that nTan Corporate Advisory was being appointed as the independent investigator and financial adviser ‘to carry out a thorough and comprehensive investigation into the transactions in question and to advise on the appropriate measures to be adopted by the group to safeguard its assets, continue its operations smoothly and enhance values to all its stakeholders’.
Before the sub-prime crisis dragged the whole world down with it, FibreChem had been one of the shining stars among the S-chips. Mr. Zhang was described as a visionary, having steered FibreChem from a producer of polyester differential fibres to being China’s pioneer in microfibre synthetic leather which is comparable to deer hide.
Thanks to his efforts, FibreChem’s revenues soared from 475 million yuan (S$107.5 million) to 1.8 billion yuan between 2004 and 2007. During that period, net profits quintupled from 101 million yuan to 538 million yuan and its net margins expanded by nearly 50 per cent.
Those who have met Mr. Zhang said he showed an enthusiasm and passion in his trade that is so typical of many successful entrepreneurs.
Recounted an investor: ‘On our way to a recent lunch meeting, the enthusiasm showed by James was infectious, with him examining and feeling the texture of the wallpaper and the curtains along the hallway as we made our way to the luncheon room.’
The most recent financial statements of FibreChem did not throw up any suspicions as well. In its third-quarter results, the company reported an 18.5 per cent decline in net earnings to HK$120.6 million (S$24 million). Revenue was flat. Meanwhile, its operations generated cash of HK$300 million. Total cash and balances with banks amounted to HK$1.17 billion while bank loans came to HK$530.5 million.
As we all know, one criterion for bottom-fishing is when a good and profitable business trades below its cash holdings. But now, if we don’t even know if the cash is really there or not, then all bets are off.
FibreChem’s fiasco, and the pummelling of China Hongxing’s shares the week before, cast even darker shadows over all S-chips, and perhaps ironically even more so on stocks that have big bank balances.
If indeed a company’s market cap is less than its cash holdings, then the enormous pile of cash sitting in the bank can be too great a temptation for some to resist - especially in desperate times like now when many are in need of cash.
The market is now rife with rumours of which other S-chips have phantom cash. Particular suspect would be those which have a big cash pile but had not declared any dividends.
Investors’ aversion of S-chips is evident. Year to date, the Prime Partners China Index is down 20.4 per cent, compared with 9.8 per cent for the Straits Times Index.
Corporate governance issues aside, it is also a fact that as a whole S-chips are going through a lot more hardships than the other stocks listed on Singapore Exchange (SGX), particularly in the last quarter of 2008.
Of the 200 companies which have reported their fourth-quarter earnings as at Thursday, 43 are S-chips.
On every score that I look at, the S-chips as a group have fared worse than the other SGX-listed stocks.
There is a higher proportion of S-chips which are in the red in the fourth quarter than the rest: 42 per cent versus 37 per cent.
Some 63 per cent of S-chips recorded lower fourth-quarter revenue, compared with 54 per cent for the rest. And the quantum of revenue decline is much sharper for the S-chips. The median revenue decline of S-chips was 14.5 per cent. The corresponding figure for the others is a mere 2.9 per cent.
Meanwhile, just under 84 per cent of all S-chips reported lower earnings per share. This compared with 76 per cent for the rest. And again, the decline is much sharper for S-chips: 40 per cent compared with 20 per cent for the rest.
Sharp deterioration
The fourth-quarter results of S-chips which have made their filings showed that the business environment had deteriorated sharply in China in the last three months of 2008.
But fortunately for them, the pretty good results in the first three quarters provided a big enough buffer for the atrocious fourth quarter. Consequently, the full-year numbers of S-chips did not look as bad vis-a-vis the other stocks.
For example, for the whole of 2008, some 24.5 per cent of S-chips were in the red. This compared with 21.8 per cent for the rest of the market.
Meanwhile, the median change in full-year revenue for S-chips was actually a rise of 13.8 per cent - higher than the 7.2 per cent increase recorded by the non-S-chips.
As for the full-year earnings per share, the median decline chalked up by S-chips was significantly lower than the rest of the market: -3.2 per cent versus -11.9 per cent.
Of course, the market is forward looking, and the fourth quarter is a harbinger of what’s to come for the rest of 2009. Hence, the severe drubbing seen in S-chips of late.
Perhaps FibreChem’s fiasco had led companies to be more careful in their statements especially when it comes to numbers, or perhaps the business environment is changing so quickly that the companies didn’t have enough time to verify the exact number.
Or perhaps it is because of poor English. Whatever the case may be, the press releases and commentaries by China Sports and Changtian Plastic and Chemical definitely did not inspire any confidence in investors in these uncertain times.
In China Sports’ press release for its results released on Thursday, every number quoted was preceded by the word ‘approximately’.
‘As a result of strong demand for YELI branded products across the board, group revenue increased by approximately 54.1 per cent to approximately RMB1,859.7 million in FY08 from approximately RMB1,207.1 million in the financial year ended Dec 31, 2007.
FY08 gross profit was up by approximately 46.2 per cent to approximately RMB386.3 million from approximately RMB264.3 million in FY07.
‘Net profit after tax increased by approximately 19.2 per cent to approximately RMB184.9 million in FY08 from approximately RMB155.1 million in FY07.’
There were 39 ‘approximately’ in the 964-word article!
Similarly for Changtian, in its review of its performance, the company wrote: ‘Our revenue decreased slightly by approximately 0.8 per cent or RMB5.2 million from approximately RMB633.2 million for FY07 to approximately RMB628 million for FY08.’
‘Approximately’ was repeated 11 times in that one paragraph.
An analyst alerted me to the two examples above and quipped: ‘Are the companies trying to tell us something?’
Well, according to Google, an approximation is ‘an inexact representation of something that is still close enough to be useful’.
And according to firsttradenet.com, ‘approximately’ is a term used in letter of credit practice which allows a 10 per cent variance above or below the value, quantity of goods, or unit price specified.
Anyway, with so much inexactitude in their financial statements, pardon me if somehow, I’m not too convinced when China Sports ended its press release by saying: ‘Barring unforeseen circumstances, we are cautiously optimistic about our performance in FY09.’
The writer is a CFA charterholder
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