China Hongqiao shares fall after reports of ‘dubious transactions’

World’s largest aluminium producer denies reports of shady and connected dealings

PUBLISHED : Wednesday, 23 November, 2016, 9:16pm
UPDATED : Wednesday, 23 November, 2016, 10:33pm

Shares of China Hongqiao fell by as much as 4.3 per cent after an anonymous online report said the aluminium producer had failed to disclose the connected nature of various transactions and used them to inflate profit and “launder” funds back to firms linked to its majority shareholder.

The report, posted on the web-site, claimed that Hongqiao’s profit margin was much higher than its domestic and global peers and is “too good to be true”. It went on to add that the company’s large capital expenditures could “be a means to offload the fake profits.”

It claimed that Gaoxin Aluminum & Power, which supplied 59.8 per cent of Hongqiao’s total power supply and 65.6 per cent of raw material alumina in the first nine months of last year, was a connected party to the Shandong province-based Hongqiao. This is in contradiction to its prospectus which said Gaoxin is an independent third party.

Hongqiao’s share price spiked in the last hour of trading to close 2.5 per cent higher at HK$7.09 after falling as much as 4.3 per cent to HK$6.62 when the market opened.

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The report claimed that both firms are located in the same industrial complex, adding Gaoxin’s filing to the State Administration for Industry and Commerce (SAIC) showed that it shares the same address, phone number and email address with a subsidiary of chairman Zhang Shiping’s privately-held Weiqiao Pioneering.

The same filing also showed that Gaoxin’s business licence allows it to produce power for “internal usage only,” a contradiction to its role as the main power supplier to Hongqiao as stated in the prospectus, the report said.

The directors are of the view that the allegations contained in the report are one-sided and misleading speculation
China Hongqiao statement

Gaoxin incurred losses of 2 billion yuan (HK$2.3 billion) each in 2014 and 2015, “as an off-balance sheet method of subsidising Hongqiao,” the report said, citing figures from SAIC filings posted on a Chinese investment portal

Gaoxin, Hongqiao and Weiqiao Pioneering all share the same bank accounts according to procurement tenders they issued, the report claimed.

Officials of Hongqiao, the world’s largest aluminium smelter, however, denied the allegations.

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“The directors are of the view that the allegations contained in the report are one-sided and misleading speculation,” Hongqiao said in a filing to the Hong Kong bourse yesterday. “The company reserves its right to take legal action for damages or other relief,” it said.

The report also accused Hongqiao of not having made sufficient disclosures in regulatory announcements about two asset acquisitions and hid the fact that it had to pay a combined 10.5 billion yuan “owed” to the assets’ original shareholders which are related to Hongqiao.

Such payments to related parties “may serve the purpose of laundering fake financial profits,” the report claimed.

Hongqiao said in a late 2014 stock exchange filing it had agreed to buy Binzhou Municipal Binbei New Material from Shandong Binbei New Material for 1.9 billion yuan. It did not mention the fact that it had to repay 5.96 billion yuan the acquired company owed to a vendor – Shandong Binbei. This was disclosed in its annual report issued in April last year, in which the payment was stated in its statement of cash flows.

The anonymous report claimed that Shandong Binbei was owned by a Hong Kong firm controlled by Liu Gang, who is the legal representative of Hongqiao’s joint venture in Indonesia and head of Hongqiao’s procurement division.

In June this year, Hongqiao said in a stock exchange filing it agreed to buy Binzhou Municipal Beihai Xinhe New Material from state-backed Citic Trust for 2.12 billion yuan. It did not mention the fact that it had to repay 4.54 billion yuan the acquired company owed to “the former shareholder” of Beihai Xinhe. This was disclosed in its 2016 interim report issued in September, in which the payment was stated in its statement of cash flows.

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The anonymous report claimed that the former owner was Liu-controlled Shandong Binbei, and that Beihai Xinhe was created in 2011 by Liu, a Hongqiao senior executive.

This “appears to be a back to back transaction [with Citic as an in between dealer] in order to disguise former ownership by Shandong Binbei,” the report claimed.

“This indicates the actual prices paid for these acquisitions are far higher than the headline [figures] reported by Hongqiao ... [this] is extremely misleading for investors because the shareholder loans are not included in the purchase prices,” it added.

Hongqiao said its directors are preparing a “detailed” clarification announcement to rebut the allegations “as soon as practicable.”

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Deloitte Touche Tohmatsu June last year resigned as Hongqiao’s external auditor, citing a disagreement over audit fees. EY later took on the auditor’s role.

JP Morgan was the sole global coordinator and sole sponsor of Hongqiao’s initial public offering in 2011. According to stock exchange data, chairman Zhang owns 81.1 per cent of Hongqiao. Some 8.78 per cent of Hongqiao’s shares are held through China Securities Depository and Clearing, which facilitates the trading of Hong Kong stocks by mainland investors under the Shanghai-Hong Kong Stock Connect cross-border shares trading scheme.

Hongqiao last year usurped state-backed Aluminium Corporation of China and Russian oligarch Oleg Deripaska-controlled Rusal in the space of two years to become the world’s largest aluminium smelter by aggressive debt-funded capacity expansion.

Government reports showed Hongqiao has been ordered by the environmental protection watchdog of Zhouping county of Binzhou city, where its facilities are located, to stop operation at production lines with combined annual capacity of 3.61 million tonnes, or over half its total, the Post reported late last month.

A company spokesman said at the time it did not disclose the penalty because it had not halted production and was on track to meet the December 31 deadline for rectifying its non-compliance issues.