China Gas Holdings' share price dived by 18.3 per cent after it revealed on Monday night that two of its directors had been detained in Shenzhen since mid-December on suspicion of embezzlement involving gas projects in Hubei province.
This raised the possibility of a worst-case scenario for the company of facing a complete write-off of the HK$178 million it spent in 2004 to acquire four city gas distribution projects and a pipeline project in the province, according to management.
At that time the company only had 26 city gas projects, compared with 146 today. Tenders and auctions did not become common practice until 2005, according to a Macquarie Securities research report.
Although the Hubei projects amount to only 4.6 per cent of the firm's total assets, 4.5 per cent of net profit and 4 per cent of gas sales, investors dumped its shares, in what Macquarie described as a 'sell first ... and ask questions later' mentality.
China Gas shares ended 14.7 per cent down, at HK$2.89, after seeing a low of HK$2.77. Trading resumed yesterday after it was halted on December 20.
'We expect the market to discount the company's growth outlook until its new leadership develops a successful track record,' a Citi analyst said in a research report. The brokerage slashed its target price on China Gas shares from HK$4 to HK$3 and cut its estimate on the company's 2012 net profit by 4.9 per cent and 8.4 per cent for 2013.
China Gas last week stripped Liu Minghui of his managing directorship, and said it would seek his resignation from the board along with president Huang Yong. China Gas has not been able to contact the men.