Shares of the Chinese construction-equipment maker Zoomlion Heavy Industry Science & Technology Co. have been halted since yesterday on the Shenzhen and Hong Kong stock exchanges in response to an online article by the newspaper Xin Kuai Bao of Guangzhou, China, reporting that the company falsified sales.
The article, which also was published on Sina.com, relied in part on documents sent anonymously by someone who claimed they were internal Zoomlion records. It's the second episode of its kind since January, which was the last time I wrote about Zoomlion. Back then, the company halted trading in its stock after an obscure news outlet published an article about an anonymously written letter that it had received accusing Zoomlion of inflating its sales.
One such event was bizarre enough. But two? In five months? Is this all it takes to get a trading suspension in a Chinese company’s shares? And is there a company on the planet with thinner skin than Zoomlion? This is one of those situations where the denial is more compelling than the article.
In a three-page filing today with the Hong Kong stock exchange, Changsha-based Zoomlion said: “All the allegations relating to fictitious sales” are “false, groundless and misleading.”
"The sales of the company were recognized strictly in accordance with the company's revenue recognition policy in compliance with China Accounting Standards for Business Enterprises and International Financial Reporting Standards," the company said.
It went on: “The company welcomes the media and the public to monitor its operation and performance. The company will continue to be accountable to the community and investors and ensure the company to achieve sound and lawful operation. However, the company hereby reprimands the media for the repeatedly false and misleading reports.”
Zoomlion also noted that its year-end financial statements for 2012 had been blessed by KPMG and another auditor, Baker Tilly, although this may not mean much to investors after the recent epidemic of Chinese accounting frauds that went undetected for years by big accounting firms. Last year, U.S. construction-equipment maker Caterpillar Inc. said it had been fooled by Chinese financial statements. The company paid $690 million to buy the owner of a Chinese maker of coal-mining equipment, Zhengzhou Siwei Mechanical & Electrical Manufacturing Co. By year’s end, Caterpillar had written off all but 16 percent of the purchase price after saying it had discovered “deliberate, multi-year, coordinated accounting misconduct.”
Zoomlion has asked that trading in its shares in Shenzhen and Hong Kong resume tomorrow. (In the U.S., Zoomlion’s American depositary receipts were down 60 cents to $9.50 in recent trading, on below-average volume.)
It’s understandable that Chinese companies would be sensitive to fraud accusations. It doesn’t take much to shake investor confidence in a company’s financial statements when the Chinese government has earned a reputation for letting securities fraud run rampant.
That said, it sure seems as if Zoomlion protests too much. The company’s shares are down 31 percent this year, giving it a $9.3 billion market value. Earnings for 2012 were 7.5 billion yuan ($1.2 billion), down 8 percent from a year earlier. By comparison, cash flow from operating activities was a mere 2.6 billion yuan. So a lot of the profits existed only on paper. More recently, earnings for the first quarter of 2013 were 570.7 million yuan, down 74 percent from a year earlier, while operating cash flow was negative 2.9 billion yuan.
What triggered Zoomlion’s first denial in January was an article by a Hong Kong-based news outlet, Ming Pao Daily, about an anonymously written letter that accused the company of overstating its sales. This time it was a different news organization that got Zoomlion to freak out. The company’s reaction surely will draw much more scrutiny than the article itself. Who knows? Maybe Zoomlion just likes all the attention.
(Jonathan Weil is a columnist for Bloomberg View. Follow him on Twitter.)