Recent negative developments on the S-chips

In the FY08 result season, a couple of S-chip companies were involved in unexpected events that resulted in trading halts and/or suspension. Common reasons include accounting irregularities and forced sale of owners’ pledged shares. Such events seriously dampened investors’ confidence in S-chip companies across the board.

Fibrechem requested a trading halt from 23 Feb 09, as the company and its auditor encountered certain difficulties in relation to the finalization of the audit of Fibrechem’s trade receivables and cash balances as at 31 Dec 08. Meantime, Mr James Zhang resigned from his position as Executive Chairman of the board. The company has appointed nTan Corporate Advisory as its independent investigator to carry out the investigation into the transactions in question. So far, no progress has been announced yet.

Beauty China has requested for 3 trading halts since 2 Mar 09. Its Chairman, Mr Wong Hon Wai, had pledged all his shares (137.5m shares, or 38.57% of the share capital) to obtain credit facilities. In order to fulfill his obligations to the financier, Mr Wong was forced to sell 28.8m of the mortgaged shares between 4 Mar and 6 Mar 09. Furthermore, on 6 Mar’09, the company was queried by SGX on its balance sheet regarding: (i) HK$42.4m impairment of trade receivables; (ii) 34.8% yoy increase of its trade receivables balance; and, (iii) 85.8% yoy increase of its other receivables balance. On 9 Mar’09, the counter requested for its 3rd trading halt within a week, pending release of announcement.

Sino-Environment’s play started on 2 Mar 09 when it requested for a trading halt after its full year results. In a similar scenario as Beauty China’s case, Chairman of Sino-Environment, Mr Sun Jiangrong, pledged all his shares (190.8m share or 56.29% of the share capital) to hedge funds. Forced sale of the pledged shares was triggered, as he failed to fulfill his financing obligations owing to the hedge funds. The possible change of control in the company further triggered bondholders’ rights to request for conversion and/or redemption of the outstanding SGD149m bonds, which the company was not able to afford. In view of this, nTan Corporate Advisory has been appointed as the independent financial advisor to carry out a review the implications and advise appropriate measures. The trading of this counter has been suspended since 6th Mar’09.

Oriental Century. Oriental Century, a 29.9% associate company of Raffles Education, has also called for a trading halt on 9 Mar. In an announcement released this morning, it was indicated that Oriental Century’s auditor, KPMG, was unable to ascertain the company’s bank balances. It was also indicated that Mr Wang Yuean, CEO of Oriental Century, had over the years inflated sales and cash balances and had diverted unspecified sums to an interested party. The trading halt had affected Raffles Education, which has fallen over 20% over 2 days. We believe this latest saga, is beyond fundamentals and will again strike at the confidence of investor on S-shares. Our recommendation and TP of Raffles Ed is currently under review.

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