Probe at Fibrechem has analysts examining other China plays here
By Goh Eng Yeow 2 March 2009
Show us the cash.
That, in effect, is what analysts want when it comes to China firms listed here.
Unanswered questions over the financial accounts at Fibrechem Technologies have led to growing doubts over the high levels of cash reflected on the balance sheets of other China firms listed here.
Investors are spooked by one basic question: Is the cash really there at all?
The beleaguered fibre-maker last week said its auditors had difficulties in finalising the audit on its trade receivables and cash balances - despite its unaudited third-quarter results reflecting a cash hoard of HK$1.17 billion (S$233 million).
Founder and chief executive James Zhang, also executive chairman since 2003, has resigned from his posts and will help with a probe now under way by an independent investigator.
For now, Fibrechem’s woes are confined to the issues raised by the auditor. No allegations have been made.
But for S-chips in general - the description of China plays listed here - the development is another blow to fast-fading investor confidence. Overall, the value of S-chips has plummeted 72 per cent in the past 12 months.
This is despite repeated ‘buy’ calls on such firms by analysts, at least before the Fibrechem disclosures, that they are trading at attractive valuations - well below their break-up cash value.
Fibrechem is the latest in a string of China firms under scrutiny since last September, when steel-coil maker Ferrochina suddenly collapsed after banks refused to roll-over its loans, despite a sterling set of second-quarter results.
At the heart of analysts’ worries is a hair-raising possibility that some China firms might be suffering from the ‘Satyam syndrome’. This refers to the recent Satyam Computer scandal, where founder Ramalinga Raju confessed to inflating earnings and inventing a US$1 billion (S$1.5 billion) cash pile to give the false impression of fast growth.
‘When a company has a lot of cash but refuses to buy back any of its shares or give out a dividend, we start to wonder if the cash is there in the first place,’ said Kim Eng analyst Pauline Lee.
It does not help to find that the accounts of many of these firms are not audited by one of the ‘Big Four’ audit firms - Deloitte, Ernst & Young, PricewaterhouseCoopers and KPMG.
Investment bank JPMorgan Chase, which flagged its concern over this issue last September, noted that under half of the S-chips are audited by a Big Four firm. By contrast, three-quarters of Hong Kong-listed China firms do so. The bank estimated firms which do not hire ‘Big Four’ auditors are 60 per cent more likely to fail than those who do.
JPMorgan flagged another concern - that while some S-chips hold high levels of cash, they are also highly indebted.
It described as inconceivable that any well- managed China firm should want to hoard cash long term when mainland banks pay only a paltry 1 per cent interest on deposits.
Another cause for concern: many S-chips are making cash calls even though they are already cash-rich.
‘If a company’s growth is self-sustaining, it does not have to raise equity. If it does so, this could indicate that management lacks capital discipline or that the growth is not sustainable,” said JPMorgan. Some S-chips also have ‘unreasonably high’ capital expenditure, suggesting they may poorly manage their manufacturing capacity and their budget.
‘It also reveals the possibility of misappropriation or financial fraud. An unreasonably high capex is often linked to other issues such as inflated profits.’
JPMorgan sieved S-chips based on the warning signs it raised. Not surprisingly, one was Fibrechem, which is now suspended from trading.
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Jitters over cash position of S-chips
Probe at Fibrechem has analysts examining other China plays here
By Goh Eng Yeow
2 March 2009
Show us the cash.
That, in effect, is what analysts want when it comes to China firms listed here.
Unanswered questions over the financial accounts at Fibrechem Technologies have led to growing doubts over the high levels of cash reflected on the balance sheets of other China firms listed here.
Investors are spooked by one basic question: Is the cash really there at all?
The beleaguered fibre-maker last week said its auditors had difficulties in finalising the audit on its trade receivables and cash balances - despite its unaudited third-quarter results reflecting a cash hoard of HK$1.17 billion (S$233 million).
Founder and chief executive James Zhang, also executive chairman since 2003, has resigned from his posts and will help with a probe now under way by an independent investigator.
For now, Fibrechem’s woes are confined to the issues raised by the auditor. No allegations have been made.
But for S-chips in general - the description of China plays listed here - the development is another blow to fast-fading investor confidence. Overall, the value of S-chips has plummeted 72 per cent in the past 12 months.
This is despite repeated ‘buy’ calls on such firms by analysts, at least before the Fibrechem disclosures, that they are trading at attractive valuations - well below their break-up cash value.
Fibrechem is the latest in a string of China firms under scrutiny since last September, when steel-coil maker Ferrochina suddenly collapsed after banks refused to roll-over its loans, despite a sterling set of second-quarter results.
At the heart of analysts’ worries is a hair-raising possibility that some China firms might be suffering from the ‘Satyam syndrome’. This refers to the recent Satyam Computer scandal, where founder Ramalinga Raju confessed to inflating earnings and inventing a US$1 billion (S$1.5 billion) cash pile to give the false impression of fast growth.
‘When a company has a lot of cash but refuses to buy back any of its shares or give out a dividend, we start to wonder if the cash is there in the first place,’ said Kim Eng analyst Pauline Lee.
It does not help to find that the accounts of many of these firms are not audited by one of the ‘Big Four’ audit firms - Deloitte, Ernst & Young, PricewaterhouseCoopers and KPMG.
Investment bank JPMorgan Chase, which flagged its concern over this issue last September, noted that under half of the S-chips are audited by a Big Four firm. By contrast, three-quarters of Hong Kong-listed China firms do so. The bank estimated firms which do not hire ‘Big Four’ auditors are 60 per cent more likely to fail than those who do.
JPMorgan flagged another concern - that while some S-chips hold high levels of cash, they are also highly indebted.
It described as inconceivable that any well- managed China firm should want to hoard cash long term when mainland banks pay only a paltry 1 per cent interest on deposits.
Another cause for concern: many S-chips are making cash calls even though they are already cash-rich.
‘If a company’s growth is self-sustaining, it does not have to raise equity. If it does so, this could indicate that management lacks capital discipline or that the growth is not sustainable,” said JPMorgan. Some S-chips also have ‘unreasonably high’ capital expenditure, suggesting they may poorly manage their manufacturing capacity and their budget.
‘It also reveals the possibility of misappropriation or financial fraud. An unreasonably high capex is often linked to other issues such as inflated profits.’
JPMorgan sieved S-chips based on the warning signs it raised. Not surprisingly, one was Fibrechem, which is now suspended from trading.
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