Aluminium products maker China Zhongwang hit with book-cooking and fraud allegations
PUBLISHED : Sunday, 02 August, 2015, 8:45pm
Eric Ng firstname.lastname@example.org
Extruded products maker China Zhongwang says short seller’s claims are groundless and auditors have never cast doubt on statements
China Zhongwang Holdings, which raised HK$9.8 billion from an initial public offering in Hong Kong in 2009, is fighting allegations from an unknown short seller, Dupre Analytics, that chairman Liu Zhongtian and his family have been siphoning money from the company.
Zhongwang suspended its share trading on Friday after Dupre published the report and said in a stock exchange filing the allegations were “groundless”, adding its external auditors had never cast doubt on its financial statements since its listing.
In the 51-page report, Dupre said Liu and his family were committing “the largest and most complex China fraud ever uncovered” and have “systematically defrauded investors, [fabricated] at least 62.5 per cent of revenue since 2011 and likely skimming billions of [capital expenditure] from the delayed [production facility] in Tianjin”.
Liaoning-based Zhongwang, which describes itself as “the second largest industrial aluminium extrusion products developer and manufacturer in the world and the biggest one in Asia”, said it would make an announcement to make further clarification on Dupre’s allegations.
Dupre’s scathing report alleged that Liu and parties related to him took out some HK$36.5 billion in loans from mainland banks, and used the funds to buy Zhongwang’s aluminium products since 2011.
According to Dupre, since 2011, some HK$38.5 billion of Zhongwang’s revenues has been “fraudulent sales to Liu-controlled undisclosed related parties”. Dupre said that based on its research, it believes the company is ultimately responsible for the loans but that it only found explicit undisclosed debt guarantee by Zhongwang on debts of HK$625 million owed by Cheng Wang Renhe, allegedly a related party supplier of Zhongwang.
“The truly remarkable thing about this fraud is that the Liu entities [on the mainland], including the undisclosed related party suppliers [Liu] secretly owns, have been able to secure over HK$17.25 billion in net borrowings from [mainland] banks,” Dupre said.
“None of these entities are remotely this creditworthy, and the clear implications are that the loans are ultimately recourse to Zhongwang,” Dupre said.
The short seller claims that Liu has set up a secretly owned re-melting facility in Mexico which has allegedly imported HK$16.3 billion of aluminium products made by Zhongwang since 2011 and turned them into aluminium billets. However, it has only been able to sell some HK$7.5 billion worth over three years.
This essentially amounts to a reversal of the production process of Zhongwang’s facilities in Liaoyang, Liaoning province, which turns billets into extrusion products used in construction, transport and industrial applications.
“It’s like taking a new car, melting it down, and selling it as steel,” Dupre said.
According to a person close to Zhongwang, many investors have called to demand explanations on the allegations.
“The nice thing about Zhongwang is that if investors bought plane tickets today to verify our report, there’s no way the Lius will be able to cover their tracks and get rid of these stockpiles quickly,” Dupre said. Its report contains a photograph of what is purportedly the Mexico facility.
Dupre also alleged Liu imported HK$4.4 billion of aluminium products from Zhongwang to his facilities in the United States, including two warehouses in California. Separate operations in Malaysia controlled by him have imported HK$10 billion worth of Zhongwang’s products, while operations in Vietnam received HK$20 billion worth of products, according to Dupre.
Dupre reckons Liu and his family have been selling the re-melted aluminium for below their purchase price. This means they “will have to absorb losses” to the tune of HK$7.7 billion if they have to repay the loans.
“If Zhongwang is on the hook for these loans as we believe, it could be insolvent.”
In September 2009, mainland newspaper The Economic Observer claimed the top 10 customers Zhongwang named in its listing prospectus were not actually its buyers. Zhongwang dismissed the allegations and the newspaper retracted the report, but not before causing the stock to nosedive from HK$8.89 to about HK$2.50. It languished there for years until a brief recovery about a year ago. It closed at HK$3.31 before the trading suspension on Friday.
In April 2010, the company again stoked doubts over its corporate governance by disclosing in the footnote to its 2009 annual results statement that it had lent 2.3 billion yuan to a local-government-owned construction firm in Liaoning.
It said at the time it had borrowed 2.3 billion yuan from two Liaoning banks and given the money to an entity named Hongwei, which it said invests in construction projects. It gave no reason for the decision, other than that it wanted “to support [Liaoning’s] local development”.
Zhongwang said it was not responsible for repaying the loan. But it recorded the debt on its own balance sheet.
Following its 2009 offering, Zhongwang has raised HK$7.4 billion from bondholders since 2012 and has borrowed unsecured loans of more than HK$5.4 billion, Dupre said.
On July 24, Zhongwang said it obtained a 20 billion yuan (HK$24.9 billion) 10-year syndicated loan facility from a consortium of six major state-owned banks, which will fund its Tianjin aluminium plant “expected to commence production soon”.
Dupre said the HK$58 billion Tianjin facility “has likely been used to siphon off at least HK$9.3 billion.
July 31, 2015 12:09 pm
Short seller attacks Chinese aluminium maker
By Lucy Hornby and Henry Sanderson
The world’s second-largest aluminium products maker, Zhongwang Holdings, suspended its shares in Hong Kong after a short seller accused the group of inflating sales by routing exports through companies it controls.
The accusations mark a second round of controversy over sales figures from Zhongwang, whose sharp increase in shipments to the US a few years ago caused Washington to slap anti-dumping duties on Chinese aluminium extrusions in 2011.
Some of the companies named in the short report, issued on Thursday by the previously-unknown Dupre Analytics, were also involved in importing products to the US at the time.
The attack by short sellers comes as exports of aluminium from China are soaring, reflecting severe overcapacity at Chinese aluminium smelters. The Chinese government taxes exports of primary aluminium but gives VAT tax rebates for semi-fabricated aluminium products, creating an incentive for both smelters and extruders such as Zhongwang to export.
Analysts say Chinese exports have helped drive aluminium prices down 11 per cent this year to their lowest levels since 2009, putting pressure on global producers.
When asked to comment on the report, Zhongwang pointed to a statement on its website which said: “The allegations against the company in the report are completely baseless and they are non-factual statements.”
Zhongwang, which has a market capitalisation of $2.33bn, requested the exchange suspend its shares on Friday morning after the short seller published the report overnight.
Dupre Analytics’ website says it has “deep experience in researching Chinese companies,” but its report on Zhongwang is its first report. Cache data show the website was set up earlier this month and there is no contact information for the group. The IP address of the website indicates it is located in the US.
Zhongwang’s shares have plunged since mid-April when they hit a four-and-a-half year high of HK$4.91. They closed on Thursday at HK$3.31.
The company’s founder, Liu Zhongtian, who owns 74 per cent of the shares, was briefly China’s richest man when his company listed in 2009. Shares fell steadily for the next several years, as media exposes questioned the group’s sales, particularly to a California-based company, Peng Cheng Aluminum, linked to Mr Liu’s brother.
Zhongwang currently exports high-value products for autos and rail cars, Zhongwang’s executive director Lu Changqing said recently. Its biggest domestic customers were Dalian Liwang, a company controlled by Peng Cheng, and state-owned China Aviation, he said.
The Dupre report alleges that Zhongwang’s sales to China Aviation subsidiaries are then sold on to a handful of other groups, all with direct ties to Zhongwang. China Aviation declined to comment.
Mon Aug 3, 2015 4:33am EDT
China aluminium maker Zhongwang denies short-seller allegations
Aug 3 China Zhongwang Holdings, the world’s second-biggest aluminium products maker, said on Monday it plans a detailed statement to respond to short-seller allegations that it inflated sales by sending shipments to companies it controls offshore.
Zhongwang, which said in an earlier filing to the Hong Kong Stock Exchange that the allegations were “groundless or untrue”, was preparing a point-by-point response, although no timeframe had been set, a Zhongwang company officer in Hong Kong told Reuters.
The aluminium maker, which has a market capitalisation of HK$18 billion ($2.3 billion), requested on Friday that trading in its shares be suspended after the release of a report by previously unknown research house Dupre Analytics.
The report echoed similar actions by short-sellers such as Iceberg Research and Muddy Waters which have released research reports questioning a company’s accounting or business practices, and have often targeted Chinese firms.
Dupre, which said it had taken a short position in China Zhongwang’s stock, alleged the firm shipped out semi-finished aluminium products to companies it controls overseas, including in Mexico and Vietnam, where the material was reprocessed back into more basic aluminium billet.
Exports of primary aluminium attract a 15 percent export tax in China, which does not apply to semi-finished products, which instead are granted a VAT rebate.
The report come amid concerns by some global producers over higher Chinese aluminium exports. China’s overseas shipments of semi-finished aluminium rose 30 percent in the first half.
Aluminium giants Alcoa Inc and Rusal say China’s exports have been a factor behind plunging primary prices this year. Benchmark aluminium prices hit six-year lows on Monday.
U.S.-based industry body, the Aluminum Extruders Council, called on the governments of China, Vietnam, Malaysia, Mexico, and the United States to investigate the claims in the Dupre report.
“If these allegations are found to be true, these governments must take all necessary steps to end these schemes,” the council said.
Dupre did not respond to a request for comment. The company’s website appeared to have been set up this year, while an analysis of the IP address suggested the company was based in the United States.
Zhongwang, which listed in Hong Kong in 2009, faced allegations that year from local media that some customers referred to in its prospectus had not bought from the company in the previous year.
It later asked an international accounting firm to conduct an independent review of its sales transactions during January 2008 through June 2009 period. The company later said it had concluded there were no deficiencies in its sales transactions.
The firm was one of a number of companies named in a U.S. investigation into dumping of Chinese extruded aluminium products in a Departement of International Trade Administration report in 2011.