Apr 30, 2015
This Listed Chinese Company Says It Won’t Stand By Its Own Earnings Report
China’s stock market is known for rampant irregularities such as insider trading and fraudulent accounting. It’s usually the regulators that catch the suspects, just like in any other country. Now, in a possible precedent for a market regarded by some as the Wild Wild West of investing, a company is suggesting publicly that its earnings report may not be accurate. Zhuhai Boyuan Investment Co., a Shanghai-listed firm that specializes in recycling industrial waste, raised the doubts from the very first words of the 2014 financial statement released Thursday:
“The company’s board of directors, board of supervisors and senior management are unable to guarantee the truthfulness, accuracy and comprehensiveness of the annual report. Nor are they able to guarantee that the report doesn’t contain any false records, misleading statements or significant omissions.”
“The reason is: the current state of the company,” Boyuan said.
That “current state” includes having recently been placed under investigation by China’s securities watchdog and police for allegations of illegal disclosure and failure to disclose important information.
The Shanghai Stock Exchange, which has already warned investors that Boyuan faces delisting, decided to suspend trading in the stock from Thursday. The bourse demanded the company offer further explanation for its claim that it can’t guarantee the truthfulness of its financial statement.That well-hedged earnings release shows that Boyuan swung into a net loss of 98.85 million yuan last year, from a net profit of 16.96 million yuan a year earlier. The company’s revenue dropped 69%, to 48.66 million yuan, during the same period.
Boyuan said its revenue tumbled because its 2014 financial statement didn’t include the sales numbers from a subsidiary, which had been included in the earnings release a year earlier. It offered no further explanation.
As a result, the company’s auditing firm Da Hua Certified Public Accountants issued an audit report about which “it is unable to express any opinion,” according to Boyuan.
Suspicious acts are never in short supply in China’s stock market.
In November, Shenzhen-listed Zhangzidao Group Co., a fishing firm based in the northern city of Dalian, said it swung to a 812.34 million yuan loss due to a sudden die-off of scallops, one of its most popular products, in the tens of thousands of hectares of sea waters that it fishes in.
The culprit, Zhangzidao said, was the extreme fluctuation in water temperature earlier that year. The explanation hardly convinced investors, some of whom suspected a misuse of funds for property development, according to local media.
In addition to the scallop problem, Zhangzidao also attributed its loss to an unspecified upgrade in the business model for abalone.
In a frankness similar to that demonstrated by Boyuan, Zhangzidao’s chairman Wu Hougang gave emotional and at times bewilderingly terse answers at a briefing with investors.
In response to a question regarding how long the stock will continue to slide, Mr. Wu answered: “Let’s pray together!”
Zhangzidao lost as much as 2.2 billion yuan of its market value within just three trading days.
More twists and turns seem to lie ahead for Boyuan. The company’s shares hit its daily downward trading limit of 5% for eight consecutive sessions after it notified investors March 30 about the risk of delisting. The stock price, however, then mysteriously hit its upward limit of 5% in the eight days immediately after that—until Wednesday when it hit another limit-down of 5%.
Boyuan issued another statement Thursday, warning investors of the risk of being delisted. That announcement started like this: “The company’s board of directors guarantee that this statement doesn’t contain any false records, misleading statement or important omissions. It’s responsible for the truthfulness, accuracy and comprehensiveness of the statement.”