Venue: Suntec City Guild House
Time & date: 10am, 29 June
AT CHINA GAOXIAN's AGM yesterday, its management assured shareholders it is doing its best to facilitate the resumption of trading of the company’s shares.
I had attended the event as a proxy of a NextInsight reader, who works in the financial industry and holds more than half a million China Gaoxian shares, which represented a big part of his investment portfolio.
This reader is one of 2,700 shareholders of China Gaoxian whose stock trading has been suspended since last March, when auditors said that the company’s bank balances could not be verified.
The company’s key financial officers and records had also gone missing.
Cao Xiangbin, the former CEO, has to sell 510 million of his shares for $1 to a white knight.
Things became more worrisome when its former CEO Cao Xiangbin stepped down last April with the confesssion that he authorized contracts amounting to S$205 million (one billion yuan) for its expansion into the upstream production of PET chips (Huaxiang project) without the board’s knowledge.
For trading to resume, the new management needs to demonstrate that China Gaoxian can reasonably assess its financial position and continue as a going concern.
Part of that involves convincing the authorities that its Huaxiang project will succeed. Its new texturizing, polymerization and spinning plants are expected to be operational by mid 2013.
Other than moving up the supply chain toward differentiated products that command higher margins, the company is also taking measures to improve internal operations such as work productivity, reducing staff turnover, and minimizing inventory levels to reduce carrying cost.
The new management has worked towards a positive resolution with a new controlling shareholder coming on board. Once the white knight -- Dymon Asia Special Opportunities Fund -- completes its due dilligence on the company, a proposal for resumption of trading will be submitted to SGX. (Read: CHINA GAOXIAN: New Controlling Shareholder To Emerge, Ex-Chairman To Be Booted Out).
Kudos to the new Gaoxian management too for hammering out a deal whereby Mr Cao has to transfer 510 million of his Gaoxian shares to Dymon Asia Special Opportunities Fund for a nominal $1. This is part of an agreement whereby the fund pays 10 cents a share for 270 million new shares to be issued by Gaoxian.
In other words, Gaoxian gets $27 million cash while Dymon gets shares at an average price of 3.46 cents.
Few shareholders are sorry to see Mr Cao pay a financial penalty for the fiasco that has happened to the company, and just as few are sorry to see him having to relinquish all management roles.
Below is a summary of questions raised at the AGM and the replies provided by its interim CEO Jerome Tham, CFO Chen Guodong and other members of its management.
Q: Why did you have to prepay Rmb 56 million on land use rights for which no agreement was signed and no land title was obtained?
We planned to acquire 2,500 hectares of land for the Huaxiang project. Last year, we obtained land use rights to 725 hectares for phase one.
We paid a deposit for phase two to secure the remaining 1775 hectares of land at the price at the time of negotiation.
This prepayment is refundable by the government if we decide not to proceed with the project.
Land for phase two is still barren and its existing inhabitants are being relocated. The government needed our prepayment for relocation expenses.
Q: Have you managed to sell any units in your commercial building project?
The 28-storey building is still under construction. It is located in an area earmarked by the Huzhou government to be a key commercial district. We intend to occupy part of the building. We have the option to rent or sell the remaining units.
Q: Are there pre-sales on other blocks in the vicinity?
Recently, China has been introducing new property control measures. Now, all buildings in China must be structurally completed before it can be pre-sold and our building has not reached that stage.
Q: Are the financial statements in your annual report for 1 April to 31 December 2011 a true and fair view of the company’s financial standing? Why was there a disclaimer by the auditor?
Under the Companies’ Act, auditors are required to give an opinion on an annual report based on a full 12-month period. Because there were missing financial records in 1Q2011, the auditors were unable to give an opinion. However, every figure in the 2nd, 3rd and 4th quarters has been verified with the assistance of our auditors.
Q: Where are your monies kept and who are the signatories to your cheque payments?
The signatories are our CFO, CEO and Chinese directors. Some of the Chinese directors are still able to sign-off on the accounts. We are trying to resolve that with help of the new shareholder that is coming in.
Q: Do you have customers to fill the new capacity coming online when the Huaxiang project is ready?
We are confident we have the best facility for the differentiated high margin product. We have identified the best salesmen in the industry. We have also identified all the potential customers in our region in Huzhou for children’s clothing.
We can't bring the key sales personnel on board yet because we need to control staff costs. But we have already talked to them. We are confident of selling the product once the plant starts operation because the economic outlook is improving.
Firstly, the Chinese government is relaxing its tight credit policy. We believe that by the time the facility is ready, there will be demand. Secondly, the situation in Europe appears to be improving and we have spoken to partners who can export our product to the global market.
Q: What happened to the Rmb 990 million and how confident are you of recovering it?
We have made a report with the public security bureau. The due investigation process is still underway.
The board has made the old management accountable for the state of affairs in the company. Mr Cao Xiangbin will give up part of his interest in the company to make up for this.
We can't say for sure what are the chances of recovering the full amount.
China Gaoxian's powerpoint materials presented at the AGM can be viewed on the SGX website here.
