Fujian Chaoda Modern headquarters in Fuzhou city
Another Chinese stock was slaughtered yesterday after allegations of fraud emerged:
Chaoda Modern Agriculture Holdings Ltd. plunged the most in eight-and-a-half years after the Hong Kong government accused it of market misconduct amid allegations the Chinese food producer overstated its land holdings.
The shares tumbled 27 percent to HK$1.10, the most since March 2003, before trading was suspended pending a price- sensitive statement. Chaoda was the second-biggest decliner on the MSCI AC Asia Pacific Index.
Chaoda's market value has been cut by HK$11.9 billion ($1.5 billion) since Next Magazine's May 26 report alleging it exaggerated its farmland, which was denied by the company. Increased scrutiny of Chinese companies including Toronto-listed Sino-Forest Corp., accused of fraud by short-seller Muddy Waters LLC, has driven down the Bloomberg Chinese Reverse Mergers Index down 58 percent this year.
Hong Kong regulators have launched a probe into Chaoda, which will face a hearing Wednesday at 5:00 pm:
As red flags about corporate governance practices at publicly- traded mainland companies continue to be raised, it emerged yesterday that another listed company may have crossed the line on regulations aimed at protecting investors from serious crime and misconduct that could lead to severe financial losses.
The Market Misconduct Tribunal will begin proceedings to investigate Chaoda Modern Agriculture Holdings (0682), the financial secretary's office confirmed yesterday.
Since late May, the company - listed on the local bourse for just over 10 years - has been unable to shake off suspicions about misleading investors on the size of its land bank.
The government investigation has coincided with a negative report leaked by Anonymous Analytics:
Chaoda has an extensive history of deceiving investors and shareholders. Since its IPO, there have been several resignations by auditors, executives, and directors. We provide proof that management has consistently lied about the reasons behind these resignations. We further show that management has time after time misled investors about the Company’s capital requirements. To this end, management has assured shareholders that the company was sufficiently capitalized, only to tap the capital markets – often within several weeks.
Rounds of financing are required because Chaoda is overstating its cash balance, exaggerating its revenue, and falsifying its financial statements. We show that reported revenue numbers make no sense and provide statistical proof as to the improbability of Chaoda’s reported margins.
Much of the money that is raised is transferred out of the Company by management and third parties. These transfers are carried out under the cover of grossly inflated capex spending, and related party transactions. We provide proof that payments made to a ‘major supplier’ owned by the CEO are simply being transferred to a shell company with no business operations and de minimis assets.