Huabao hit by fake-profits claim
Shares in Huabao International Holdings plunged by almost a fifth yesterday. Investors dumped the stock even after the company defended itself from an anonymous online research report accusing it of inflating profits and alleging that the firm's chairwoman, Chu Lam Yiu, had illegitimately 'recycled' proceeds of share sales back into the company to sustain high dividend payouts.
Huaboa's shares fell as much as 18 per cent when they resumed trading after being suspended for six trading days because of the anonymous report. Huabao recovered some lost ground to close 7 per cent lower at HK$3.70 yesterday.
Chu, nicknamed the 'queen of cash-outs' by the Hurun Research Institute, which put her second on a list of mainland entrepreneurs who became rich by cashing out of their firms, is accused by Anonymous Analytics of a 'pump-and-dump' scheme to enrich herself at the expense of minority shareholders.
Anonymous Analytics is a blog that claims to be a corporate-level offshoot of Anonymous, a loosely connected group of computer hackers who say their work exposes shenanigans and promotes political transparency.
According to Anonymous Analytics, Chu has sold down her stake in Huabao from 74.9 per cent in early 2007 to 37.7 per cent early last year in five disposals at increasingly high share prices, raising some HK$9.4 billion in the process. Huabao makes tobacco flavouring fragrances.
In a report late last month, Anonymous Analytics said it had scrutinised 23 sets of documents covering the company's subsidiaries lodged with various units of the State Administration for Industry and Commerce (SAIC). Based on its analysis of the filings, Anonymous Analytics said most of Huabao's subsidiaries made gross profit margins of 40 to 50 per cent, in line with industry standards but short of the 74 per cent reported by the firm in 2010.
The gross margin of Huabao's core business also jumped from 48 per cent in 2006 to 70 per cent in 2007 for no apparent reason, Anonymous Analytics said. Huabao attributed the discrepancies between its mainland and Hong Kong financial results filings to the fact that the mainland figures were based on December 31 year-ends and the Hong Kong ones on March 31 year-ends.
Huabao also denied Anonymous Analytics' allegation that Chu had injected assets into Huabao at inflated values to 'rationalise' Huabao's cash levels, and that she had transferred back into the firm some of the HK$9.4 billion proceeds from her disposals of Huabao shares to sustain dividend payouts and shore up investor confidence.
Anonymous Analytics had accused her of buying the assets first and selling them to Huabao at inflated prices shortly afterwards to escape questioning by independent asset sellers, but Huabao provided details of the acquisition prices paid by Chu and Huabao to show that she had not benefitted by the asset shuffling.