A short seller has come forward with allegations that China Hongqiao Group is reaping significant profit margins by distributing a hefty and unsustainable debt load to companies it says are intimately related to its founder and other top company men.
According to an article in Financial Times, an anonymous short seller has published a report it says exposes the power company providing China Hongqiao’s energy is controlled by family and associates of Zhang Shiping. The short seller’s report used what it says are public documents to trace ownership of Gaoxin Aluminum and Power (Gaoxin), which is the largest single supplier of power to Hongqiao, to Zhang. The report points out that Gaoxin shares contact information with Weiqiao Pioneering, which, they allege, is Zhang’s “private conglomerate,” and that all three firms allegedly share a single bank account.
The report goes on to allege that Gaoxin’s below-market energy deals, which Hongqiao credits with allowing it to post such high margins, has actually shown significant net losses over the past two years. This, say the short sellers, is simply a way to move debt off of Hongqiao’s books and show investors and the market in general a strong financial picture.
The short sellers in question also point out two significant but allegedly undisclosed related party transactions were vehicles for Hongqiao to “launder” profits. In late December 2014, Hongqiao purchased Binzhou Municipal Binbei New Materials Co Ltd (Binbei) from Shandong Binbei New Materials Co (Shandong Binbei) for CN¥1.896 billion. According to the report, which cites public documents, Binbei has significant ties to Hongqiao, sharing top personnel with Hongqiao. The short sellers also allege that the price actually paid to Shandong Binbei was significantly higher than reported, saying that the acquisition multiple could have been up to 11.8x earnings instead of the reported 2.76x.
The second transaction the short sellers say is problematic is the acquisition of Binzhou Beihai Xinhe (“BBX”) from CITIC in the summer of 2016. The report alleges that the transaction was meant to obscure previous ownership of BBX by Shandong Binbei. According to public documents referenced in the report, BBX was formed in 2011 by Liu Gang, a Hongqiao executive.
All in, according to the report, Hongqiao has an overall debt load of CN¥67.7 billion when the transactions described are included on the firm’s balance sheet.
The report concludes by referencing Hongqiao’s environmental issues, brought to light late last month by the South China Morning Post. It then calls into question a deal made earlier this year to purchase a stake in Lofton Environmental Energy, describing the purchase of a firm that has allegedly sold off the lion’s share of its aluminium business as a “shady deal.”
For its part, Hongqiao issued a brief rebuttal advising shareholders and other investors that the company’s directors were aware of the report, calling the allegations made within it “one-sided and misleading.” The rebuttal promised a more comprehensive response would be issued in the near future, but urged shareholders and investors to use “extreme caution” when transacting Hongqiao securities and when viewing the report.