Shenguan is latest Hong Kong-listed mainland firm under fraud spotlight

Trading in food products supplier suspended following reports of 'unreasonable' margins

PUBLISHED : Thursday, 04 September, 2014, 1:09am
UPDATED : Thursday, 04 September, 2014, 9:07am

Shenguan Holdings (Group) is the second Hong Kong-listed Chinese company to be hit by fraud allegations in as many days, following similar allegations on Tuesday against Tianhe Chemicals Group.

Shares of Shenguan were suspended at 1.27pm yesterday after Emerson Analytics, a group of equities analysts, issued a report alleging unreasonably high profit margins and dividend payouts at the sausage casing maker.

Shenguan's shares fell 3.2 per cent to HK$2.71 before trading was halted on the heaviest turnover in three months, with 15.6 million shares changing hands. Its share price had declined from HK$2.96 on August 14 to HK$2.80 on Tuesday.

Since August 20, Shenguan chairwoman Zhou Yaxian has bought 3.5 million shares in the company, raising her ownership to 2.16 billion shares or a 65 per cent stake, according to Shenguan announcements.

The company announced a total interim dividend per share of 7.5 HK cents for the first half, which means Zhou will receive a HK$162 million payout.

"Shenguan has been doctoring its books since its October 2009 IPO when it raised 1.2 billion yuan from the Hong Kong market," alleged Emerson.

A Shenguan spokeswoman said the company had "no comment at this stage and will provide an official reply later."

Tianhe's shares were suspended on Tuesday at 11.20am after Anonymous Analytics issued a report alleging the chemical company's profits and revenue were massively inflated. Tianhe has denied the allegations and threatened to sue Anonymous Analytics for libel.

"What makes this unique is the sheer size of it. Tianhe is a big company," said a hedge fund manager who declined to be named. Tianhe, which listed in June, has a market capitalisation of HK$58.98 billion. Its IPO sponsors were Morgan Stanley, Bank of America Merrill Lynch and UBS.

"The allegations, if true, raise questions on the quality of due diligence of the three banks," said corporate governance activist David Webb.

The three banks declined to comment.

Short seller interest in Tianhe shares has soared to 2.28 per cent from 0.5 per cent on July 30, a 386 per cent jump in one month, according to Markit, a global financial information provider.

Short seller interest accounted for 0.9 per cent of Shenguan's shares as of September 1, up from 0.7 per cent on August 21.

Separately, the Ontario Securities Commission in Canada held a hearing on Tuesday on Sino-Forest, the target of fraud allegations in 2011. The commission's lawyer Hugh Craig said five China-based senior executives of Sino-Forest committed fraud and misled investors by overstating revenues and assets between 2007 and 2010. Sino-Forest's lawyers denied their client committed any fraud.