West China Cement denies fraud
West China Cement's stock went on a roller-coaster ride yesterday, after the mainland cement producer denied allegations of fraud by US short seller Glaucus Research Group.
The price of its shares in Hong Kong plunged 16 per cent to a low of HK$1.09 each and then hit a high of HK$1.35, before closing down 1.5 per cent at HK$1.28. In one of its heaviest trading days, 170.33 million shares changed hands yesterday.
The company, headquartered in Xian, the capital of Shaanxi province, held a media conference in Hong Kong yesterday and issued a 10-page rebuttal of Glaucus' allegations. On Wednesday, Glaucus posted a research report on its website saying West China Cement was 'a blatant fraud'. Glaucus's claims included falsifying profit margins, suspiciously overpaying to buy loss-making cement plants and borrowing money at unusually high interest rates.
'The [Glaucus] report contains certain allegations or comments on the company, which are groundless or misstatements,' West China Cement said, adding that 'the company is consulting its legal advisers and reserves its rights to take legal actions against Glaucus'.
Italcementi, an Italian-listed cement maker that is the third-biggest shareholder of West China Cement, sent an e-mail to the mainland company on Wednesday saying it would issue a statement of support, according to West China Cement executive director Low Po Ling.
Italcementi had not issued such a statement as of press time, and did not respond to an e-mail seeking comment.
On June 28, in a 504 million yuan (HK$617.6 million) deal, Italcementi, the world's fifth-largest cement company, completed its acquisition of a 6.25 per cent stake in West China Cement in return for selling its stakes in mainland cement plants to West China Cement.
In March and April, West China Cement acquired 65 per cent of loss-making Shaanxi cement plant, Shifeng Cement, for 474.5 million yuan from mainland businessman Li Dawei. With the Italcementi deal, West China Cement raised its stake in Shifeng to full ownership. Glaucus described West China Cement's acquisition of 65 per cent of Shifeng as 'suspicious' because of the allegedly inflated price it paid.
Glaucus visited Li's address stated in documents of China's State Administration for Industry and Commerce (SAIC), finding a humble dormitory belonging to a water treatment plant.
'Li Dawei lives in a luxurious house. I have known him for 10 years,' West China Cement chairman Zhang Jimin said. But, Zhang said he did not know where Li lived and had never visited Li's home.
West China Cement said its fat profit margins were due to high selling prices between 2008 and the first half of 2011. Glaucus said West China Cement borrowed 420 million yuan in May, 2008 at an effective interest rate of 20.23 per cent, which Glaucus called 'a hallmark of an obvious fraud'. West China Cement countered that the interest rate was due to the Chinese government's tight credit at that time.