Fibrechem Technologies - Audit issues

Audit issues. Fibrechem posted during the lunch break that it has appointed Nicky Tan as an independent investigator and financial advisor. The official announcement says that there were certain difficulties encountered by auditors during the finalization of the audit of the group's trade receivables and cash balances. In short, accounting fraud - the worst-case scenario for the company. CEO James Zhang has offered to resign from his position as CEO and acting CEO Mr. Xu Xu Hui, takes his place. No information flow. We are still hitting a brick wall in getting any access to management or board member. Phone calls are unanswered - all we know is that the management team is currently in China.

Balance sheet shows no warning signs. We attach the last reported balance sheet of the firm. Revenue per quarter is about HK$480m while full-year revenue run-rate is HK$1.9bn to HK$2.0bn. Trade receivables stand at HK$280m. Although revenue growth was growing, trade receivables had not grown by much. Assuming all the current trade receivables are fictitious, net cash of HK$544m (S$0.12 per share) will be halved. Bigger problem would be if trade receivables have been made up all along and clients had been fictitious. This could transpire into a situation where even the cash on the balance sheet is not real. It is pointless to speculate at this point. Shares remain suspended, book value is S$0.62 but accuracy is in serious doubt, fair value is impossible to ascertain.

Suspending coverage. Our last target price was S$0.72 and our last rating was Outperform. We are suspending coverage on this stock until further information is disclosed.

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