Lumena New Materials, a Chinese chemicals company that has come under attack from short sellers, has said the negative research has caused it difficulties to maintain the support of its banks, creditors and suppliers

http://www.ft.com/fastft/244751

http://www.emersonanalytics.co/downloads/Lumena-HK_0067-Delisting.pdf

https://glaucusresearch.com/wp-content/uploads/downloads/2014/03/GlaucusResearch-China_Lumena-HK_0067-Strong_Sell_March_25_2014.pdf

http://www.ifrasia.com/china-pair-raise-alarm-for-lenders/21139477.article

http://www.scmp.com/print/business/china-business/article/1465116/lumena-denies-allegations-fraud

(67) Lumena: China Lumena New Materials Corp announced, based on the information provided by the Company’s senior management team in the PRC subsequent to the issuance of the reports by certain research groups against the Group in March and April 2014 as described in the announcement of the Company dated 3 April 2014, the Company has encountered difficulties in maintaining the continual support from, among others, local banks in the PRC, creditors and suppliers, which has impacted the Group’s operations. As a result, the Group can now only maintain a low level of production of its major products of thenardite and polyphenylene sulfide. The Company has been in discussions with several industrial peers and other third parties on possib le co-operation arrangements for the PPS and thernardite business operation and the Group and its creditors have been in discussions with a view to agree on a debt stabilisation programme for the Group’s outstanding borrowings, including but not limited to extension of the repayment dates and refinancing of the existing loans

China’s Lumena flags fading creditor support

5 hours ago

Lumena New Materials, a Chinese laxatives company that has come under attack from short sellers, has said the negative research has caused it difficulties to maintain the support of its banks, creditors and suppliers.

The company added on Tuesday that its chairman Zhang Zhigang and CEO Zhang Daming have both been suffering “health issues” that mean they “may not be able to perform their respective duties”.

Lumena makes thenardite, a chemical whose applications include laxatives.

In allegations the company has strongly rejected, US short seller Glaucus Research raised questions in a March 2014 report over Lumena’s accounting. Glaucus wrote:

Lumena claims to sell ~300,000 tons of medical thenardite, primarily used as a laxative, every year. If this is true, we estimate that Lumena would have to sell an average of 30 doses of medical thenardite ever year to every human being in China over the age of 14. This simply defies credibility.

Lumena said in a statement to the Hong Kong stock exchange:

Subsequent to the issuance of the reports by certain research groups against the Group in March and April 2014…the Company has encountered difficulties in maintaining the continual support from, among others, local banks in the PRC, creditors and suppliers, which has impacted the Group’s operations. As a result, the Group can now only maintain a low level of production of its major products of thenardite and polyphenylene sulfide.

Trading in the shares of Lumena, which is one of a large group of Chinese companies to come under attack from research houses who aim to profit from short selling after publicly attacking companies, has been suspended since March 25.

Glaucus said in its report:

Obviously, we will make money if the price of Lumena stock declines.

In an April 3 statement, Lumena said the allegations against the company by Glaucus and another organisation, Emerson Research, were without merit.

China pair raise alarm for lenders

IFR Asia 838 – April 05, 2014 | By Tessa Walsh, Sandra Tsui, Prakash Chakravarti

China pair raise alarm for lenders

Share suspensions for two privately owned Chinese borrowers have made overseas lenders increasingly concerned about the transparency of Chinese companies’ financial reporting standards.

China Lumena New Materials Corp, the chemicals company targeted by a US short seller late last month, has put a refinancing loan of up to US$120m on hold, while jelly maker Labixiaoxin Snacks Grouphas asked lenders to waive covenants on a US$75m loan after a delay to its annual results.

Bankers are nervous after the first default in China’s domestic bond market last month underlined fears of rising credit risks in China amid signs that the economy is slowing. The Hong Kong Monetary Authority has asked banks to tighten approval processes on syndicated loans for Chinese companies raising offshore loans in Hong Kong.

Premier Li Keqiang warned that China’s economy faced “severe challenges” after the first bond default and said that further defaults would be “hard to avoid”, signalling the government had become reluctant to step in to support failing companies.

Lumena halted trading in its Hong Kong-listed shares on March 25. In a stock exchange filing on March 28, the company said it needed more time to finalise audited accounts for 2013.

Lumena is currently trying to raise a one-year loan via lead Mega International Commercial Bank, priced at 495bp over Libor. It refinances a one-year loan of US$85m maturing in early May, which paid 405bp.

Lumena, which produces natural thenardite products and polyphenylene sulphide, risks breaking a covenant on its existing US$85m loan if it does not announce its 2013 annual financial results by April 11 or if its shares are suspended for more than 20 days, lenders say.

Lumena’s shares were suspended after short-seller Glaucus Research Group published a report on March 25 alleging the company had made numerous material misrepresentations to investors. The company’s share price dived 7.4% to HK$1.25 on March 25 before the suspension.

Lenders can either wait for Lumena to repay its existing loan in May or ask the company to prepay in April if it fails to announce its annual results on April 11, which will trigger an event of default.

Market forces

Labixiaoxin is in a similar situation. Its shares were also suspended on March 24 after publication of the snack maker’s annual results was delayed, which also raised the possibility of the company’s breaking its loan covenants. Local media reports had alleged that Labixiaoxin overstated its sales and margins, and claimed its supply chain was contaminated.

Labixiaoxin is now offering banks a fee of 50bp to waive covenants, which say the company’s shares cannot stay suspended for more than 15 days and that it must file annual financial results within 90 days of its financial year-end and audited accounts within 120 days.

Labixiaoxin has an existing US$75m three-year amortising loan via arrangers Deutsche Bank, China Development Industrial Bank and Taishin International Bank, which was signed in February 2013.

“Lumena is being questioned by a short-seller. That is more worrying than the Labixiaoxin case, which was only a media report,” another source said. “The short-seller has a comprehensive research report.”

Beijing’s tougher debt stance came after leaders said they would allow market forces to play a greater role in the economy. In forcing markets to price risk more accurately, they hope to cut back on poor investment decisions.

Corporate debt accounts for most of China’s overall debt-to-GDP ratio of 221% at end-2103. Many Chinese companies started raising offshore loans in Hong Kong in 2013 after PRC Government regulations curbed onshore dollar lending.

The HKMA has not issued any specific guidelines for lenders, but is putting pressure on banks to improve further their processes and controls. However, lenders say opaque financial reporting standards complicate the decision-making process.

“What can the arrangers or lenders do in such situations?” a banker asked. ”They do not lend blindly to the credit. They rely on the audited financial statements and also carry out added due diligence with site visits to the borrowers’ factories,” he said.

 Lumena denies faking key sales data

Karen Chiu
Wednesday, March 26, 2014
China Lumena New Materials Corp (0067) said a short- seller’s claim that it had faked key sales data by 90 percent was groundless and the firm will release its annual results as scheduled on Friday.

Shares of the Sichuan-based industrial chemical producer tumbled by 7.4 percent to HK$1.25 before trading was halted yesterday morning. It said trading will resume as soon as possible.

Glaucus Research, a California-based short-seller, recommended a “strong sell” for the stock, saying it was worthless. Glaucus claimed Lumena’s sales were 90 percent less than actually reported.Glaucus also cast doubt on the veracity of the firm’s tax payment, profitability and financial stability. The short-seller questioned Lumena’s reported earnings before interest and tax margin of 56 percent from 2008 to 2012.

The EBIT of other large-scale public companies selling similar products apparently ranged between 5-10 percent in the same period, the US research house said.

It also said Lumena’s accounting data does not match with cost of sales of its major customers. It added the company now has 4.2 billion yuan (HK$5.25 billion) in outstanding loans and a batch of US$120 million convertible bonds due in May that may need refinancing.

“All the claims do not match with the truth and the company reserves the right to take legal action,” executive director and chairman Zhang Zhigang shot back yesterday.

Zhang said Lumena will make a clarification with sufficient proof to investors as soon as possible. It will also conduct a share buy-back at the right time.

Glaucus alleged Lumena may have been misleading investors ever since listing in 2009. The move comes just months after Glaucus Research made similar claims against Prince Frog International Holdings (1259), whose stock price has plunged by up to 50 percent.

China Investment Corporation, the nation’s sovereign wealth fund, is a minority shareholder in Lumena.

Lumena denies allegations of fraud

Saturday, 05 April, 2014, 1:07am

Business›China Business

Toh Han Shih hanshih.toh@scmp.com

Chemical firm says allegations ‘not based on any facts’, and it may take legal action

Industrial chemical maker China Lumena New Materials yesterday denied allegations of fraud contained in two recent reports.

Emerson Analytics issued a report on Tuesday that alleged Lumena had inflated its 2012 revenue by seven times, and it should have lost 372 million yuan (HK$467 million) in 2012 instead of reporting a net profit of 1.39 billion yuan.

Emerson’s website describes it as “a group of seasoned equities analysts … determined to expose as much of the fraud in the Chinese stock market as we can”.

On March 25, Glaucus Research, a US short-seller, issued a report accusing Lumena of making “numerous material misrepresentations” in its 2009 initial public offering prospectus and subsequent financial statements. Glaucus alleged Lumena’s sales and profitability were 90 per cent less than the company reported.

In a statement posted on the website of the Hong Kong stock exchange yesterday, Lumena said the allegations by Glaucus and Emerson were “not based on any facts or are misrepresentations” and that it might take legal action against Glaucus.

Lumena said the release of its 2013 annual results had been delayed because its auditor, BDO, needed more time to finalise its accounts.

“The fact that the annual report is delayed is a very bad sign,” said a hedge fund manager who declined to be named. But he also pointed out that Emerson’s report wrongly stated Lumena’s market capitalisation as HK$70.1 billion, when it should be HK$7 billion.

In a 22-page clarification, Lumena refuted in detail eight points made by Glaucus.

Both Glaucus and Emerson allege Lumena’s reported sales of medical thenardite, which is used as a laxative, in China were unrealistically high. Emerson said the figures implied every mainlander took 30 doses a year.

Glaucus countered that its medical thenardite had a wide range of other uses, including cosmetics and veterinary drugs.

Glaucus alleged that State Administration for Industry and Commerce records of Lumena’s two subsidiaries, Sichuan Chuanmei Mirabilite and Sichuan Chuanmei Special Glauber Salt, contained significant inconsistencies with Lumena’s financial statements.

Lumena disputed Glaucus’ allegation, and said it would make financial documents available for its shareholders to inspect from 2.30pm to 4.30pm on weekdays until April 30.

Lumena suspends trading, delays report amid claims of ‘misrepresenting’ financials

By Steve Toloken
STAFF REPORTER / ASIA BUREAU CHIEF

Published: April 18, 2014 10:19 am ET
Updated: April 18, 2014 10:22 am ET

China Lumena New Materials Corp., which says it has the world’s largest manufacturing capacity for polyphenylene sulfide resin, has suspended its stock trading and delayed its annual financial report after being hit with allegations it dramatically overstated sales.

The Chengdu, Sichuan Province-based Lumena denies the allegations, contained in two recent reports from analysts that accused the company of making “numerous material misrepresentations,” including that its sales and profits from PPS were 90 percent less than it claimed.

Lumena, in an April 4 filing to the Hong Kong Stock Exchange, strongly disputed the claims made by Glaucus Research Group and Emerson Analytics.  It said Glaucus stood to gain financially if Lumena’s share price dropped, a point which Glaucus, a short-selling investor, acknowledged in its report.

“The Company believes the allegations made in the [Glaucus] report to be without merit and not supported by evidence,” said Lumena Chairman Zhang Zhigang, in a statement. “The Company is seeking legal advice from its legal advisers and reserves its rights to take legal actions against Glaucus and Emerson Analytics.”

But the two reports are not the first time similar questions have been raised about Lumena.

A 2011 story in the specialized financial news service Debtwire pointed out large differences between Lumena’s financials reported in Chinese tax filings to the State Administration of Industry and Commerce and figures given to the Hong Kong Stock Exchange for another company unit processing the mineral thenardite.

The company said it was based on discrepancies between preliminary electronic tax filings and official filings. That story was also published on the website of the Financial Times newspaper.

Lumena initially planned to issue its 2013 full-year financial report March 28, but after the Glaucus report came out March 25, and then the Emerson report April 1, it said it was delaying that until it responded in full to both. Its shares remain suspended from trading.

Glaucus said its 24-page report was based on reviews of publicly-available Chinese tax records, which it said show that Lumena reported only 181 million Chinese yuan ($29.1 million) of income from its PPS business in 2012, 91 percent less than it reported to the Hong Kong stock market.

“The [Chinese government] filings suggest that not only is Lumena fabricating PPS revenue, but that the Company overpaid for the RMB 10 billion ($1.6 billion) acquisition of the PPS business from the former Chairman and other shareholders in 2011,” Glaucus said.

Lumena paid for the purchase with 10 percent in cash and 90 percent in stock.

Emerson issued a 43-page report April 1 that argues, based on observations of its production plants and estimates of capacity based on information from its raw material and equipment suppliers, that Lumena’s PPS resin production is about 5,000 tons, or about 18 percent of what the company claims.

Lumena, in its April 4 filing with the Hong Kong market, said the Glaucus report contained incorrect information and that its two business units making PPS reported 2.93 billion Chinese yuan ($471 million) in revenue in 2012.

It said those tax documents would be available for inspection at its Hong Kong office on working days until April 30.

“The Company wishes to point out that the financial information of Sichuan Deyang Chemical set out in the Glaucus Report was wrong and without basis,” Lumena said.

“The substantial discrepancies between the financial information contained in the Glaucus Report and the Group’s actual circumstances have demonstrated that Glaucus does not even have the most basic understanding of the Group’s operations,” Lumena said.

Lumena said it would respond in detail to the Emerson allegations later.

Lumena and DSM Engineering Plastics in May 2012 announced that they were in talks about jointly marketing some grades of engineering plastics and developing alloys of PPS and polyamide resin.

In May 2013, a DSM executive said at the Chinaplas trade show that the two companies remained in “intensive discussions” about a partnership. DSM did not respond to an email and telephone call about the status of those talks.

Lumena did not respond to a phone call and email.

Glaucus also noted that the credit rating agency Moody’s withdrew its rating of Lumena in December, which Glaucus said could make it harder for Lumena to refinance $120 million debt due in mid-May.

Moody’s said in a statement only that it ”has withdrawn the rating for its own business reasons.”

Lumena did not address the Moody’s rating in its filing but said its financials were audited in accordance with the rules of the Hong Kong stock exchange.

In March, the company said in a statement that a new 25,000 metric ton PPS resin production line would begin trial production in June, boosting its total capacity to 55,000 metric tons. The company said it will add another PPS production line this year.

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