Cosco (S) tanks as China audit flags parent’s breach
But Singapore subsidiary says it was not cited in the China report
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But Singapore subsidiary says it was not cited in the China report
By LYNN KAN
24 May 2011
Jitters over the corporate governance standards of S-chips have surfaced once more, this time sparked by an audit report by the Chinese National Audit Office (NAO) about the state of affairs in Chinese state-owned enterprises (SOEs).
The NAO faulted 17 Chinese SOEs, including Cosco (S)’s parent company, for financial irregularities in a report released last Friday.
The market reaction was swift and adverse, with the stock of Cosco Corporation (S) falling prey, prompting Cosco (S) to issue an after-market clarification.
By 3pm yesterday, Cosco (S) shares were down by a sharp 5.9 per cent to $1.91. It ended the day at $1.89, a full 14 cents or 6.9 per cent down from the previous day.
In a filing to SGX after the close of trading, Cosco (S)’s board said ‘neither the company nor any of its subsidiaries has been cited as having committed any irregularities and disciplinary violations in the NAO report’.
NAO homed in on Cosco Group and nine affiliated companies, which made up 81 per cent of Cosco Group’s total assets.
NAO reportedly found that in 2009, Cosco Group understated profits of 17.7 million yuan (S$3.4 million), which represented 1.27 per cent of total profit.
It is also said to have under-reported 273 million yuan of assets or 0.11 per cent of total assets, 4.7 million yuan of liabilities or 0.005 per cent of total liabilities.
It has since adjusted its accounting records and reports.
NAO said about 94 per cent or 735 cases of discovered irregularities were put right and 65 people punished by the end of March 2011.
The total extent of these 17 SOEs’ under-reporting amounted to profits of 1.2 billion yuan, assets worth 2.9 billion yuan and liabilities of 2.5 billion yuan.
They are also said to have overstated 1.9 billion yuan of assets and 2.63 billion yuan of profits in 2009.
Cosco Group’s financial mismanagement, overly complex bureaucracy and employee compensation issues were detailed in the NAO report.
For instance, between 2007 and 2009, Cosco Dalian is said to have used 1.07 billion yuan of loans meant to fund working capital to build a hotel. Cosco Dalian has since returned the loan.
In the same period, Cosco Group acquired and redid a golf course for 110.2 million yuan, which lost 7 million yuan a year. Cosco Group has been trying to cut losses through various measures and exit the venture.
Cosco Group was described by NAO as having as many as 11 layers of companies. Five tiers alone contained as many as 763 subsidiaries or 66.8 per cent of Cosco’s total number of subsidiaries.
The NAO report prompted Cosco Group to streamline its management chain to nine tiers.
Also, the Cosco Group headquarters and its affiliates were said to have falsified invoices amounting 979,000 yuan and 16.9 million yuan, respectively, to pay out employee bonuses and allowances.
While this laundry list was by no means a depiction of what goes on at S-chip shipbuilder Yangzijiang, it was collateral damage nonethless.
Yangzijiang tanked 10 cents or 5.8 per cent to end yesterday at $1.62. It is neither an SOE nor was it named in the NAO report.
The market’s reaction was startling given that many did not know how the practices of China Cosco Holdings impacted its Singaporean counterpart and that the NAO report was based on dated FY2009 accounts.
Yet, said a hedge fund manager, the selldown came from a ‘better safe than sorry’ mentality. ‘It’s sell first, think later,’ he said.
What hastened Cosco (S)’s share price decline further was the already dour regional market sentiment yesterday as rating agencies Fitch and Standard & Poor flagged fresh fears about the European sovereign debt crisis.
‘Given the environment today, everyone was more sensitive about the bad news on corporate governance,’ he said.
Yangzijiang declined to comment on its pummelled share price.