Turkey of the year: Reality check on Bursa-listed China-based firms

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turkeyoftheyearsIT IS time for Bursa Malaysia-listed, China-based firms to have a reality check, looking at their deepening financial woes and distressed share prices. Two companies that come to mind are China Stationery Ltd (CSL) and China Ouhua Winery Holdings Ltd, which have seen hiccups in their financials and changes in external auditors.

Stationery maker CSL’s previous auditors, Messrs Foo Kon Tan Grant Thornton LLP, stepped down in January. According to CSL, the auditors had resigned as the board “couldn’t agree on the proposed new professional fee presented to it”.

“On top of that, the engagement audit partner who was in charge of the company’s audit and has an extensive experience in auditing stationery companies or companies related to the stationery industry, has retired from Grant Thornton,” CSL said in its filing to Bursa recently.

According to CSL, this was explained to its shareholders in a special general meeting in January, although the details of the meeting were not disclosed to the public at the time.

In April, CSL reported a fire that ravaged its 15,423 sq m plant in Fujian, China. According to the company’s filing with the local bourse, the fire damaged 10,000 sq m of the plant and destroyed its administrative office, along with its financial records and legal stamps.

Because of the incident, CSL failed to submit its audited financial statements for the financial year ended Dec 31, 2013 (FY2013), which was due on April 30.

After a two-month extension and Bursa’s rejection of a further extension, the company managed to file its statements in the nick of time in early July.

However, CSL’s new auditors, Messrs RT LLP, had attached a disclaimer in the financial statements saying that it had not able to obtain the appropriate audit evidence to provide a basis for an opinion.

Last month, CSL released its third-quarter results ended Sept 30, showing an 89% decline in earnings from the previous corresponding period.

Pre-tax profit fell to RM7.95 million from RM71.21 million previously, on the back of a 75% slide in revenue to RM60.92 million (from RM242.18 million). The company attributes the decline to the fire in April and a slowdown in China’s economy.

The company’s revenue started declining in the first quarter with a 26% y-o-y dip. In the second quarter, there was a 75.5% y-o-y tumble.

Another point to note is that CSL’s major shareholder, Lead Champion Ltd, has been aggressively paring its stake in the company. The stake now stands at 23.45%, compared with 74.88% in February 2012, when CSL was listed.

Year to date, CSL’s share price has fallen 62.5% to 7.5 sen at Dec 17’s close, with a market capitalisation of RM98.6 million. This is barely a tenth of its initial public offering (IPO) price of 95 sen.

At winemaker and distributor China Ouhua, external auditors, Helmi Talib & Co, had qualified its opinion on the company’s financial statements for FY2013 ended Dec 31, 2013, which was released in April this year.

For FY2013, China Ouhua posted a significant net loss of RMB93.86 million (RM52.39 million) compared with RMB102,000 in the previous year.

The auditors were uncertain about the purchase of 40 acres of land for RMB132 million in Yantai, China. The acquisition also included the buildings and ancillary facilities on the land.

Helmi Talib noted that no independent professional valuation of the assets had been made. “In the absence of an independent valuation, we were unable to ascertain whether the net recoverable amount of the assets acquired will exceed the total purchase consideration,” it said in the FY2013 audited statements.

It was unable to obtain sufficient appropriate audit evidence to satisfy the extent of recoverability of the deposits — worth RMB118.8 million and 90% of the total cash consideration — if the transaction fell through.

The auditors were also unable to obtain sufficient appropriate audit evidence on the collectability of “long outstanding receivables of RMB44.93 million which are past due but not impaired as at Dec 31, 2013”.

China Ouhua made RM58.44 million in net profit for FY2009 just before it listed on Bursa Malaysia in November 2010.

It saw two changes in auditors before the appointment of Helmi Talib for its FY2013 accounts. It had started out with Ernst & Young LLP in 2010, followed by Baker Tilly TFW LLP for the next two years.

The company’s share price declined 19% year to date to 6.5 sen at Dec 17’s closing, with a market capitalisation of RM46.76 million. The share price is only a little over 10% of the IPO price of 60 sen.

This article first appeared in The Edge Malaysia Weekly, on 22 - 28 December 2014.