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IPO

IPO

Embattled China Zhongwang a supplier to military producer

PUBLISHED : Thursday, 05 November, 2009, 12:00am
UPDATED : Thursday, 05 November, 2009, 12:00am

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China Zhongwang Holdings, the mainland aluminium producer battling allegations it misrepresented aspects of its initial public offering prospectus, is a supplier to a firm that makes Chinese military products.

In a revelation that may unsettle Zhongwang's mainly foreign investors, Cheng Tiangang, the company secretary of mainland manufacturer Baotou Beifang Chuangye, said his firm 'has been buying Zhongwang's products to make national security sensitive products for the military. Baotou has been buying from Zhongwang for many years, with peak procurement in 2006'.

Zhongwang raised HK$9.8 billion on the Hong Kong Stock Exchange in late April and has not previously disclosed its military links.

Most of the aluminium processor's largest investors are American funds, which are not banned from investing in suppliers to the Chinese military. But one fund manager with a stake in the Liaoning-based aluminium processor said he was surprised the company had failed to disclose this detail about its customers. 'Foreign investors in China rely entirely on IPO prospectuses for full and unbiased corporate disclosure. I absolutely would have preferred to know about this.'

Global fund managers put great effort into forecasting the future demand of customers of firms they have invested in. But Beijing's military budget is a closely guarded secret.

UBS and Citic Securities, Zhongwang's IPO sponsors, and Deloitte, the reporting accountant, all declined to comment.

On September 14, the mainland newspaper, China Economic Observer, issued a report claiming that 10 of the customers Zhongwang named in its IPO prospectus did not buy from the company last year.

The Observer retracted its story. Ernst & Young is now independently reviewing Zhongwang's customer sales data. But Zhongwang shares have slumped 15 per cent since the report was published, closing yesterday at HK$7.34. Its share sale prospectus said its customers were in the rail, automobile, shipbuilding, real estate and aircraft industries. In its share offer roadshow, the Liaoning firm linked its future prospects to Beijing's infrastructure spending stimulus, analysts and fund managers who attended the events said.

Zhongwang's IPO document describes Baotou Beifang as a supplier to the Ministry of Railways.

Vincent Cheung Lap-kei, Zhongwang's finance director, wrote in an e-mailed response to questions: 'We understand that Baotou Beifang Chuangye is a manufacturer of railway carriages and we don't know if they have [any] other kind of business.' Cheung also said Zhongwang sold 1.41 billion yuan worth of aluminium to Baotou in the 31/2 years from January 2006 to July this year, or 4.5 per cent of total sales. Baotou may not have used all of this for military products, its head of procurement, Liu Tiuxie, said, although he professed not to know exact details.

In interviews with the South China Morning Post on September 16 and October 27, Cheng said Baotou did no business with Zhongwang.

Cheng retracted those comments in a November 2 interview, and disclosed his firm's military division used Zhongwang products. He said that while Baotou had a large rail-car manufacturing arm, this business did not use material from Zhongwang. The latest financial results of Inner Mongalia-based Baotou, which is listed on the Shanghai Stock Exchange, included a short footnote revealing one of its subsidiaries makes army tanks.

Stockbroker Nomura, which rated Zhongwang's shares a 'buy' yesterday, said it would stop following the company until Ernst & Young's findings were published.

Aluminium sales

Zhongwang, from January 2006 to July this year, sold aluminium to Baotou Beifang Chuangye - whose unit makes tanks - worth, in yuan: 1.41b