HONG KONG - The latest debt downgrade of Chaoda Modern Agriculture (Holdings),
which bills itself as China's largest fruit and vegetable producer, further
undermines confidence in Chinese companies and the strength of their corporate
The downgrade by Moody's Investors Service last week came amid claims Chaoda's
top two executives had engaged in insider trading. The debt was downgraded by
six notches to B3 "junk" status from investment grade Ba3 and the rating was
placed on review for further possible downgrade.
Numerous mainland companies, many of them agricultural firms and many listed in
America, are now involved in investigations
over alleged accounting irregularities and bad governance. In February, Li
Hanchun, former chief executive of Hong Kong-listed China Forestry, was
detained in the mainland for alleged embezzlement. China Forestry in May
admitted its bank statements and harvesting records had been faked, while its
accounts had gone missing.
Since then, more than 40 privately owned Chinese companies listed on US
exchanges have acknowledged accounting problems or regulatory investigations.
Hong Kong-listed Chaoda's present difficulties could result in accelerated
repayment of its US$200 million convertible bonds, which will further weigh on
its liquidity, said Ken Chan, Moody's vice president and senior analyst. Its
shares, down more than 80% this year, are suspended and its annual earnings,
due on September 30, have yet to be released.
Holders of the outstanding convertible bonds can accelerate repayment if stock
trading is suspended for more than 60 consecutive days, a threshold that was
breached on November 25, or if the company fails to file its full-year results
within 180 days from its fiscal year-end. Chaoda faces a potential battle with
bondholders, Moody's said when earlier downgrading its debt to Ba3 from Ba2 on
The latest downgrade also reflects that "various unresolved external
allegations further lift the overall risk profile of the company and materially
pressure its rating", said Chan on Tuesday.
Chaoda recently raised about HK$461 million through the sale of its 8.2% stake
in a Hong Kong and London-listed mainland orange grower, Asian Citrus Holdings,
in which Chaoda still holds 5.4%, but Moody's expects the company will still
need to rely on the repatriation of onshore cash to meet the potential
repayment amount. Shares in Asian Citrus, plunged 28% in Hong Kong trade on
September 30 to a record low of HK$3.62. This week they were trading at
HK$4.80, down from above HK$10 before the Christmas break last year.
Chaoda's cash balance was 3.9 billion yuan (US$615 million) as of December
2010. The company has not reported its audited cash holdings since then and has
not disclosed how much of the cash is held outside the mainland, where it can
be used to repay foreign bondholders. Only 2% of Chaoda’s cash was held in
offshore bank accounts as of April 2010, according to the company’s 2010 annual
Trading in Chaoda's shares was halted on September 26 after the Hong Kong
government launched an investigation into alleged insider trading involving
chairman Kwok Ho and chief financial officer Andy Chan Chi-po.
The two top executives gave confidential information to George Stairs of
US-based Fidelity Management & Research about a planned June 2009 share
placement by the listed company, which days later raised HK$1.74 billion
(US$224 million), according to a notice posted by Hong Kong Financial Secretary
John Tsang Chun-wah on the website of the government's Market Misconduct
Tribunal on September 29. Stairs is still employed by Fidelity but has moved
from running the institution's International Value Fund to a research position.
The notice said Stairs profited by trading on the confidential news. Fidelity
said in a statement Stairs did not violate any laws or regulations.
Tsang asked the tribunal to investigate Chaoda. The tribunal has powers to levy
fines for market misconduct and disqualify directors. It can impose civil but
not criminal sanctions.
In late September, Anonymous Analytics, an arm of the computer hacking group
Anonymous, alleged in a 38-page report that Chaoda’s management had falsified
its financial statements and swindled investors.
Castor Pang, head of research at Core Pacific-Yamaichi, told Asia Times Online
in reference to the scandals that have hit agricultural firms, said, "investors
find it difficult to verify the assets the mainland agricultural firms have
claimed, as there is no centralized registry for agricultural land".
Big agricultural firms tend to strike land-use agreements with collectives of
rural villagers in transactions supervised by village heads.
"Agricultural firms need to improve their transparency such as providing more
information about their land," he said.
In early June, American short-seller Carson Block, whose investment vehicle is
named Muddy Waters - a research house that profits from shorting the shares of
companies it criticizes publicly - accused Toronto-listed mainland forestry
firm Sino-Forest Corp of faking land holdings and sales in Yunnan province.
The problems with the mainland agricultural firms also reflected concern over
auditors, said Francis Lun, managing director at Lyncean Holdings Ltd, an
investment holding company in Hong Kong.
"China Forestry's auditor KPMG ... is one of the big four with Deloitte, Ernst
& Young and PricewaterhouseCoopers [PwC], so how people can believe other
auditors" dealing with the so-called largest companies in China, "which could
fake finances and even entire companies," Lun said.
Ernst & Young has been named in at least two class action lawsuits over its
work on Sino-Forest.
In May, Beijing-based and US-listed Longtop Financial Technologies said that
its auditor, Deloitte, had resigned after discovering the company's financial
statements were false.
Subaye, a Nasdaq-listed Chinese cloud-computing company, announced in April
that PwC Hong Kong resigned as its auditor as it could not obtain information
to verify cash settlements from sales agents to the company, nor could it
verify the end customer subscriptions for Subaye's services.
Olivia Chung is a senior Asia Times Online reporter.
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