Fraud-hit china forestry warns of first-half loss

PUBLISHED : Thursday, 14 July, 2011, 12:00am
UPDATED : Thursday, 14 July, 2011, 12:00am


China Forestry Holdings, which has said it was defrauded by its former chief executive, yesterday warned it will report a loss for the first half of the year.

The warning came in a filing posted on the Hong Kong stock exchange website yesterday.

Listing rules require companies to issue a profit warning ahead of a formal results announcement if the management finds there is a substantial change in the company's financial performance. The timber firm made a profit in the same period last year.

The filing said accounting irregularities disclosed in late April had a negative impact on the business operations and financial results of the group, while interest costs for senior notes issued in November last year were also partly to blame.

Trading in the shares of the Hong Kong-listed mainland logger has been suspended since late January after its auditor, KPMG, identified 'possible irregularities' during its audit of last year's financial results.

The company set up an independent committee to check on the possible irregularities and in April announced it was the victim of the fraud of its former chief executive Li Hanchun, who was detained on the mainland in February for allegedly stealing 30 million yuan (HK$36.14 million) of company funds.

The logger, whose investors include US private equity firm Carlyle, has said Li falsified bank statements, management accounts and harvesting records, while other books and records were missing.

Moody's Investors Services has downgraded the bonds of the company by three notches to Caa2, which is below the threshold for junk bonds, saying Li's 'misrepresentation and fraudulent behaviour' signalled 'potentially hidden financial liabilities'.

Standard & Poor's also lowered the notes' rating to CC from B-plus, saying it believed the 'company's financial profile and business sustainability have substantially weakened'.

Louis Tse Ming-kwong, director of VC Brokerage, said privately owned mainland companies such as China Forestry did not maintain good disclosure practices and Li's arrest had damaged the trust of investors.

'It is hard for investors to be confident about investing in any company in which a former senior manager has been arrested,' he said.