China Zhongwang Holdings, which raised HK$9.8 billion from an initial public offering in Hong Kong in 2009, is fighting allegations from an unknown short seller, Dupre Analytics, that chairman Liu Zhongtian and his family have been siphoning money from the company. Zhongwang suspended its share trading on Friday after Dupre published the report and said in a stock exchange filing the allegations were "groundless", adding its external auditors had never cast doubt on its financial statements since its listing. In the 51-page report, Dupre said Liu and his family were committing "the largest and most complex China fraud ever uncovered" and have "systematically defrauded investors, [fabricated] at least 62.5 per cent of revenue since 2011 and likely skimming billions of [capital expenditure] from the delayed [production facility] in Tianjin". Liaoning-based Zhongwang, which describes itself as "the second largest industrial aluminium extrusion products developer and manufacturer in the world and the biggest one in Asia", said it would make an announcement to make further clarification on Dupre's allegations. Dupre's scathing report alleged that Liu and parties related to him took out some HK$36.5 billion in loans from mainland banks, and used the funds to buy Zhongwang's aluminium products since 2011. It's like taking a new car, melting it down, and selling it as steel Dupre Analytics According to Dupre, since 2011, some HK$38.5 billion of Zhongwang's revenues has been "fraudulent sales to Liu-controlled undisclosed related parties". Dupre said that based on its research, it believes the company is ultimately responsible for the loans but that it only found explicit undisclosed debt guarantee by Zhongwang on debts of HK$625 million owed by Cheng Wang Renhe, allegedly a related party supplier of Zhongwang. "The truly remarkable thing about this fraud is that the Liu entities [on the mainland], including the undisclosed related party suppliers [Liu] secretly owns, have been able to secure over HK$17.25 billion in net borrowings from [mainland] banks," Dupre said. "None of these entities are remotely this creditworthy, and the clear implications are that the loans are ultimately recourse to Zhongwang," Dupre said. The short seller claims that Liu has set up a secretly owned re-melting facility in Mexico which has allegedly imported HK$16.3 billion of aluminium products made by Zhongwang since 2011 and turned them into aluminium billets. However, it has only been able to sell some HK$7.5 billion worth over three years. This essentially amounts to a reversal of the production process of Zhongwang's facilities in Liaoyang, Liaoning province, which turns billets into extrusion products used in construction, transport and industrial applications. "It's like taking a new car, melting it down, and selling it as steel," Dupre said. According to a person close to Zhongwang, many investors have called to demand explanations on the allegations. "The nice thing about Zhongwang is that if investors bought plane tickets today to verify our report, there's no way the Lius will be able to cover their tracks and get rid of these stockpiles quickly," Dupre said. Its report contains a photograph of what is purportedly the Mexico facility. Dupre also alleged Liu imported HK$4.4 billion of aluminium products from Zhongwang to his facilities in the United States, including two warehouses in California. Separate operations in Malaysia controlled by him have imported HK$10 billion worth of Zhongwang's products, while operations in Vietnam received HK$20 billion worth of products, according to Dupre. Dupre reckons Liu and his family have been selling the re-melted aluminium for below their purchase price. This means they "will have to absorb losses" to the tune of HK$7.7 billion if they have to repay the loans. "If Zhongwang is on the hook for these loans as we believe, it could be insolvent." In September 2009, mainland newspaper The Economic Observer claimed the top 10 customers Zhongwang named in its listing prospectus were not actually its buyers. Zhongwang dismissed the allegations and the newspaper retracted the report, but not before causing the stock to nosedive from HK$8.89 to about HK$2.50. It languished there for years until a brief recovery about a year ago. It closed at HK$3.31 before the trading suspension on Friday. In April 2010, the company again stoked doubts over its corporate governance by disclosing in the footnote to its 2009 annual results statement that it had lent 2.3 billion yuan to a local-government-owned construction firm in Liaoning. It said at the time it had borrowed 2.3 billion yuan from two Liaoning banks and given the money to an entity named Hongwei, which it said invests in construction projects. It gave no reason for the decision, other than that it wanted "to support [Liaoning's] local development". Zhongwang said it was not responsible for repaying the loan. But it recorded the debt on its own balance sheet. Following its 2009 offering, Zhongwang has raised HK$7.4 billion from bondholders since 2012 and has borrowed unsecured loans of more than HK$5.4 billion, Dupre said. On July 24, Zhongwang said it obtained a 20 billion yuan (HK$24.9 billion) 10-year syndicated loan facility from a consortium of six major state-owned banks, which will fund its Tianjin aluminium plant "expected to commence production soon". Dupre said the HK$58 billion Tianjin facility "has likely been used to siphon off at least HK$9.3 billion.