China Gaoxian founder Cao Xiangbin sold 60 million shares at the point of listing.
The Straits Times, March 26, 2011
By Goh Eng Yeow, Senior Correspondent
IT MAY look like just another S-chip train wreck, but the accounting irregularities raised at textile maker China Gaoxian are far more worrying.
While China Hongxing Sports and Hongwei Technologies, which both reported accounting problems last month, listed more than five years ago, China Gaoxian made its debut only 18 months ago.
This makes this latest S-chip scandal all the more serious, because China Gaoxian listed six months after clean-up measures were implemented following a spate of earlier S-chip irregularities.
As one of the biggest IPOs of 2009, China Gaoxian was supposed to flag an all-clear signal to investors that it was back to business as usual for S-chips.
After all, its independent directors included Mr Philip Chan, a former listings head with the Singapore Exchange.
In January, China Gaoxian rode high on a strong vote of investor confidence to raise $240 million from South Korean investors after getting its stock sponsored as a depository receipt listing in Seoul.
So its trading suspension this week is a big blow to the already tarnished S-chip sector and may sound the death knell for similar fund-raising exercises by other S-chips in Seoul.
It is also worth noting the interesting parallels between China Gaoxian and steel-coil maker FerroChina, which was suspended from trading more than two years ago.
Just to jolt the memory, FerroChina was also riding high with investors when it suddenly closed shop in October 2008, purportedly because banks refused to roll-over its short-term loans.
But as some traders noted, the warning signals had been there for years, if anyone had cared to look.
Company insiders had been whittling down their stakes, selling about 155 million shares, or 18 per cent of the company, between 2005 and 2008.
And as a company purportedly sitting on a huge cash hoard, it had short-term debts of 2.33 billion yuan, with banks taking literally everything - bank deposits, inventories, buildings - as collateral for their loans.
Now take a look at China Gaoxian and one will notice more than a passing resemblance to FerroChina.
The company's 2009 prospectus showed that executive chairman and founder Cao Xiangbin sold 60 million shares at the IPO issue price of 26 cents apiece at the point of listing.
A year later when the lock-up period ended for major shareholders, Carry Luck, a company owned by one Mr Hong Rong Zhi, lost no time in selling out too.
In just two days last September, Carry Luck sold 53 million shares at 19.5 cents apiece and another 25.1 million shares at 19 cents each - both well below the 26-cent listing price.
The sales took Carry Luck's stake to 4.99 per cent from 10.42 per cent.
Another telling sign: the company had raised $78.2 million from its IPO here in 2009 and another $223.8 million from selling 600 million new shares in Seoul in January.
Yet, like FerroChina, it had behaved like a cash-strapped firm, asking customers to pay up in cash and drawing down on its bank credit lines.
It was this contradiction that prompted the SGX to put a query to the company.
In hindsight, investors should have asked why China Gaoxian needed to raise so much cash over such a short period if its growth was self-sustaining. And what happens to that huge sum now? Is it still in the company's coffers?
And shouldn't a question have been asked about the huge sales of China Gaoxian stock by a major shareholder last September, at below the IPO issue price?
It is strange that irregularities could surface at China Gaoxian with FerroChina scandal still fresh in investors' minds. And it is a chilling reminder to all investors to stay vigilant at all times.
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