West China Cement hit by fraud claim

PUBLISHED : Thursday, 09 August, 2012, 12:00am
UPDATED : Wednesday, 15 August, 2012, 11:15pm


Shares in mainland cement maker West China Cement were suspended from trading at the company's request yesterday, following the release of an analyst's report alleging the company was guilty of 'blatant fraud'.

In its statement to the Hong Kong stock market, West China Cement requested the suspension 'pending the release of a clarification announcement by the company which is price-sensitive in nature'.

In little more than an hour's trade before the request notice was filed and granted, 34.78 million West China Cement shares changed hands, equivalent to a full day of heavy trading; but the share price fell only marginally from an overnight close of HK$1.32 to HK$1.30 when trading was suspended at 10.51am.

The request followed the overnight release of a scathing report by Glaucus Research Group, a US firm that investigates Chinese listed companies, accusing West China Cement of 'fabricating' its financial statements.

'We believe that West China Cement is a blatant fraud. We believe West China Cement's margins are fabricated,' the report stated.

The report alleged documents by China's State Administration for Industry and Commerce indicated that the profit margin of one of West China Cement's cement plants was far below the margin stated by the company. A cement price war in Shaanxi province last year 'exposes the absurdity of West China Cement's margins,' the report stated.

But a local analyst who declined to be named said he was puzzled by the claims. 'According to our estimates, West China Cement's gross profit sounds reasonable,' he said.

Headquartered in Xian, the capital of Shaanxi province, West China is the leading cement producer in the province.

On May 4, Italcementi Group of Italy acquired 6.25 per cent of the company, making it the third-biggest shareholder. In a press release at the time, Italcementi said it would be a strategic partner and have an executive on West China's board.

Italcementi is listed on the Italian stock exchange and is the world's fifth-largest cement producer.

In its damning report Glaucus also claimed that some of West China Cement's acquisitions were suspicious. 'West China Cement appears to be massively overpaying to acquire money-losing cement factories. We suspect such transactions are secret payments to related parties,' it said.

'We sent an investigator to the registered address of the largest reported shareholder of a cement factory recently acquired by West China Cement - a man who allegedly received over 244 million yuan (HK$299 million) - yet his registered address was a grimy dormitory for a water treatment plant, suggesting that rather than being a wealthy factory owner, he was a front man and possibly a conduit for an undisclosed payment to insiders.'

In the report's disclaimer, Glaucus cautioned: 'We are short sellers. We are biased. Just because we are biased does not mean we are wrong. If we are lying, we will get into serious trouble. We are prepared to support everything we say in a court of law.'

Neither Italcementi nor West China Cement responded to the South China Morning Post's questions yesterday.