Shenguan's war of words continues over fraud claims

Emerson Analytics has published a second report alleging fraud in Shenguan Holdings Group, but the Hong Kong-listed firm rebutted the allegations on Tuesday night as the battle between the two flared anew.

"The allegations in the reports concerning the company are malicious and groundless. The company and directors are deeply shocked and furious about the reports. The company reserves the right to take legal action against those responsible for the reports and to hold them responsible for all losses caused to the company," said the mainland sausage casing maker.

Emerson, a group of anonymous equities analysts, issued a report alleging inflated profits and artificially suppressed costs at Shenguan on September 2, to which Shenguan replied with a 14-page report on September 26. Emerson followed with a second report on Shenguan on September 29, alleging that the company gave "more lies and lame excuses" in Shenguan's first rebuttal.

Shenguan's shares were suspended on September 3 and resumed trading on September 29. Its share price fell by 11.4 per cent to HK$2.40 on September 29 from HK$2.71 during mid-session on September 3. The shares then rebounded 8.8 per cent to HK$2.61 on September 30, above the share price of HK$1.10 predicted by Emerson. Shenguan bought three million of its own shares for HK$7.86 million on September 30 plus 14 million of its own shares for HK$33.32 million on September 29, the company announced.

Emerson's second report alleged the sales volume figures disclosed in Shenguan's first rebuttal contradict the conversion rate of cattle inner skin, the volume of sausage casing that can be produced from the inner skin of cattle, as calculated in Emerson's second report. Shenguan said the conversion rate in Emerson's second report is "inaccurate and untrustworthy".

Shenguan also denied the allegation in Emerson's second report that the 12.3 per cent increase in Shenguan's sales volume in 2012 did not reflect the 33 per cent rise in raw material costs that year. The increased raw material costs partly arose from trial runs for new production lines, Shenguan explained.