Lixil’s China Accounting Fraud Woes Trigger Losses of $533 Million

http://www.wsj.com/articles/lixils-china-woes-trigger-losses-of-533-million-1433322234

http://www.ft.com/intl/cms/s/0/3bb3b760-098b-11e5-8534-00144feabdc0.html#axzz3bzDeABZV

Lixil’s China Woes Trigger Losses of $533 Million: Losses stem from accounting scandal at Joyou unit

ERIC PFANNER And MEGUMI FUJIKAWA

Updated June 3, 2015 5:25 a.m. ET

TOKYO— Lixil Group Corp., a Japanese provider of bathroom fixtures and building supplies that has expanded aggressively overseas, said Wednesday that an accounting scandal at a subsidiary operating in China would cause up to ¥66.2 billion ($533 million) in one-time losses.Lixil, which owns the American Standard brand and acquired the Grohe Group of Germany in 2013, lowered its earnings for the financial year ended March 2014 and cut its earnings forecasts for the following two years.

The losses stem from the insolvency of Joyou AG, a German-listed Grohe subsidiary that provides toilets, sinks and other plumbing supplies in China. Joyou has dismissed its chairman, Cai Jianshe, and his son, Cai Jilin, the deputy chairman, saying in a statement that they “engaged in inaccurate accounting and unlawful reporting for many years.”

The two men couldn’t immediately be reached for comment.

“There are both opportunities and risks in China,” Lixil chief executive Yoshiaki Fujimorisaid at a news conference. “Doing business in China is difficult, but we take this as a lesson. If we can build firm governance, we can do well because China has a good market and there is nothing wrong with Grohe’s products.”

The purge at Joyou comes amid a heightened focus on accountability and auditing at Japanese companies, with the introduction of a new corporate governance code this month. Another Japanese company, Toshiba Corp., is investigating accounting irregularities that may have caused it to overstate profits by at least ¥50 billion.

Lixil, formed in 2011 through a combination of five Japanese providers of plumbing and building supplies, is the latest of several Japanese companies to stumble with overseas expansion. Japanese firms are looking abroad for growth as they face a stagnant domestic market.

Mr. Fujimori said the Joyou scandal would delay Lixil’s plans to achieve half its sales overseas.

“It doesn’t mean that we will stop our activities or that we aren’t willing to look for acquisitions anymore,” he said.

Lixil halved its net income for the year ended March 2014 from ¥44.8 billion. It also cut its net income estimate for the recently ended business year to ¥22 billion, from a range of ¥24.5 billion to ¥31 billion. The company plans to finalize and release the financial results on Monday.

Lixil also said it may post one-off Joyou-related losses of up to ¥33 billion in the current financial year, lowering its net income by ¥22 billion.

Mr. Fujimori said Lixil was contacted by a Chinese bank in April with concerns about Joyou’s accounting. Lixil uncovered off-the-book loans that the company is still investigating.

Lixil said in May that the problems had resulted in the loss of half of the registered share capital of Joyou.

The Japanese company bought Grohe from TPG Capital and Credit Suisse’s private equity arm. Mr. Fujimori said he would call on the two firms to take their share of responsibility only if the probe showed that this was a reasonable demand.

A Credit Suisse representative declined to comment. A TPG spokesperson wasn’t immediately available for comment.

Lixil’s shares have fallen sharply since late April, when the company said it was investigating accounting irregularities at Joyou. Though the financial hit announced Wednesday is larger than an earlier estimate of ¥41 billion, the shares bounced back 4.5% Wednesday on investor relief that the losses weren’t even larger.

June 3, 2015 2:26 am

Lixil cuts earnings guidance citing China unit’s woes

Kana Inagaki in Tokyo

Lixil, the Japanese household fittings manufacturer, has lowered its full-year guidance after saying it now faces a loss of up to Y33bn ($266m) due to a China-based, German-listed subsidiary having filed for insolvency.

The company expects to have booked a net profit of Y22bn compared with a previously forecast range of Y24.5bn to Y31bn. It also revised its net profit for the fiscal year that ended in March 2014 to Y20.95bn from Y44.76bn.

Lixil stock jumped as much as 6.3 per cent in early trading — the biggest gain in eight months — suggesting shareholder relief that the loss was not deeper.

The company will hold a press conference later on Wednesday.

Joyou, a part-owned Lixil group company listed in Frankfurt, announced last month that it had started insolvency proceedings after writing off $300m on guarantees given to creditors of a subsidiary, Joyou Hong Kong, a holding company for eight Joyou operating businesses in Fujian province, eastern China.

Joyou also said it was dismissing its chairman and group founder, Jianshe Cai, and his son Jilin Cai, deputy chairman, and was looking into “comprehensive legal action” against the two men.

In 2011, German bathroom products group Grohe took control of Joyou from Jianshe Cai and his family and later increased its stake to 72.3 per cent.

In January 2014, private equity group TPG and its associates sold 87.5 per cent of Grohe to Lixil, in co-operation with the state-run Development Bank of Japan, in a deal giving Grohe an enterprise value of €3.05bn. The deal, which Grohe billed as “the largest-ever German investment by a Japanese company”, included Grohe’s 72.3 per cent holding in Joyou.

Lixil, which flagged the accounting irregularities at Joyou at the end of April, has been forced to postpone the release of its full-year results. It earlier said it would face losses of up to Y41bn, including a loss of up to Y16bn on certain guarantees linked to the liabilities of a Joyou subsidiary.

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