Bad apples from China, of which Dawnrays may be one, threaten to sour the reputation of HKEx Someone is lying. Is it Dawnrays Pharmaceutical (Holdings), its lead manager ICEA Capital or the person who sent an anonymous e-mail to newspapers in Hong Kong last week? This is the question potential investors have to answer as they consider whether to buy any of the 248 million shares offered by Dawnrays at between 75 cents and $1.03 a share. The offer opened on Monday and closes tomorrow. The e-mail accused ICEA and Dawnrays of presenting inflated sales and profit figures and falsifying other statistics in its listing prospectus. It would not have been taken seriously and published in any newspaper but for the fact that the last company brought to market by ICEA - a subsidiary of the state-owned Industrial and Commercial Bank of China - was Euro-Asia Agricultural (Holdings). The China Securities Regulatory Commission has accused Euro-Asia of inflating its revenue by 20 times in the four years to 2001 to earn a Hong Kong listing. The Euro-Asia scandal highlights a key dilemma for Hong Kong Exchanges and Clearing (HKEx). China offers the best supply of new companies to list and is essential to its growth, but the veracity of the data companies supply is suspect. Each new Euro-Asia makes Hong Kong more like China's own poorly governed stock markets. Can the market and its investors trust the data they are given by Chinese accountants, lawyers, valuers and other middlemen? Dawnrays was set up by Li Kei Ling and Hung Yung Lai, who emigrated from Shanghai to Hong Kong in the 1980s and went into the pharmaceuticals import-export business, focusing on China. Neither was a pharmaceutical specialist but their business prospered because they could access the restricted mainland market. But as China's pharmaceuticals market opened up, opportunities for middlemen diminished and they decided to go into production instead. They registered Dawnrays Pharmaceuticals in the Cayman Islands. The company invested US$16.6 million in a plant in Suzhou in 1996 and started production in 1998. So far, so good. But now comes the hard part, as investors take a careful look at Dawnrays' data. The firm reported turnover in 2000, 2001 and last year of 58.5 million yuan, 177 million yuan and 328 million yuan respectively, with profits in the three years of 217,000 yuan, 48.3 million yuan and 100 million yuan. 'It is making a net profit of over 30 per cent, highest among all its listed peers in the world,' said the e-mail. 'For western formula and generic drugs without patent protection, this sounds ridiculous.' Peter Wang, Dawnrays' vice-financial controller, told a group of journalists yesterday that he too would be suspicious of these profit figures if he were an investor. But he defended them vigorously, citing the quality of the company's R&D and product line, low cost structure, nationwide sales network, low level of debt and accounts receivable and the fast-growing mainland market. Asked why the company did not apply for patents, vice-president Zhao Shixi said that there was no benefit in doing so. 'In applying, you make public what you are doing and others may learn of it. To apply is dangerous. It is better not to apply,' he said. Mr Zhao added that while his firm had nothing exclusive, its edge was in the third generation of the antibiotic cephalosporin, its main product. Zhang Jingxing, Dawnrays' president and executive director, earlier this week defended the firm's increase in turnover and net profit over the three years. He said the phenomenal growth stemmed from the eventual development of a positive market and a sizeable clientele. He further blamed a reduction of state-controlled antibiotics prices for the fall of Dawnrays' gross profit margin from 56 per cent in 2000 to last year's 53 per cent and said the downward pressure would continue. But hanging over yesterday's press conference was the shadow of Euro-Asia and its chairman Yang Bin, awaiting sentence in a Shenyang prison after his trial on charges that included falsifying financial information to win a listing. ICEA blamed the cooking of the books on the team who did the listing and were subsequently fired. Perhaps, they speculated, it was one among them who sent the e-mail to get revenge on his former bosses. Mr Yang's associates admit falsifying Euro-Asia's figures but put the blame on middlemen, including the sponsors and the accountants. 'Yang wanted to list, yes, but did not understand all the financial details. The middlemen said that they could arrange it, so he signed what they gave him,' one of his former aides said during the trial in Shenyang. 'He was not sophisticated in that way. They took advantage of him and received big commissions.' So where does the buck stop as those involved pass it swiftly between them? And how is the investor in his comfortable office in Central or Chicago supposed to know the secrets of a private Chinese company registered offshore and operating in a city he has never seen and does not want to visit?