Tuesday, January 29, 2013

China Metal Recycling - shares suspended

Shares in China Metal Recycling (HK:773) remain suspended today pending the company's response to allegations of fraud by a short seller.  There have been several allegations of fraud against PRC companies in the past and this is the not the first time I have found myself invested in a company involved in controversy (not necessarily fraud). The most recent example was China Gas (HK:389) which I still hold and which is currently my largest single stock investment by some margin and a hugely profitable one.

CMR is audited by Deloitte Touche Tohmatsu. According to AA Stocks, UBS had a buy recommendation with a $15.20 price target last week and HSBC has reiterated a buy recommendation today (i.e. after the allegations) with a price target of HK$13.00. If I have been wrong about CMR, I am in good company.

CMR has denied the short seller's allegations and promised to clarify shortly. In the mean time, there isn't much I can do until the suspension is lifted. When it is lifted, I would expect there to be a meaningful drop from the pre-suspension price of HK$9.43.


Anonymous said...

and it was all looking good with the 30% CECEP stake that drove the stock up significantly when announced. Now what... I agree with TraineeInvestor that if we have been wrong about CMR we are in good company. Is this a case of an American short seller punching under the belt out of frustration that things are not looking very good at home?

traineeinvestor said...

Yes, It's rather frustrating but with a big 4 audit firm standing behind the accounts and state backing, I am hopeful that the worst case outcome is similar to China Zhongwang (1333) which effectively ended up about 50% below its pre-crisis level and never recovered. Of course, if the brokers who cover the stock and the auditors are right any sell off could be a wonderful opportunity (like China Gas).

We'll just have to wait and see.

Of course, if CMR's board wants to give the short seller a hard time all they have to do is announce either a special dividend or a share buy back.

Unknown said...

I have a bad feeling about China Metal Recycling. They promised comment after the suspension and since then have remained silent. I find that ominous. They have pushed back the deadline for publication of results from end May to end June, so there is obviously a difficult investigation going on.

As for China Zhongwang, I bought it in May, long after the problems and it has continued downwards and today, - end June 2013 - it sits at the lowest price in years.

I really worry about Chinese accounting and about the quality of the auditors to verify information. I think we need a few shareholder class actions against the auditors to make them be more diligent in investigating a company's figures.

If they had been sufficently diligent first time around, they would have been able to come out and confidently say "We trust the numbers and stand by them".

If companies have committed accounting fraud, the perpetrators must be found and heavily punished as a warning to others.

Anonymous said...

Hong Kong regulator seeks liquidation of fraud-accused China Metal Recycling


I do hope that the chairman's property will be seized as well.

traineeinvestor said...

Given what I have read in the paper and the SFC press release, it would appear that the alleged fraud has been going on since the IPO. The fact that two people have been arrested and that the SFC managed to persuade a court to appoint provisional liquidators sends a pretty clear message about the SFC's views.

At this stage, one would expect the SFC and HKEX to be asking some very pointed questions of the sponsors, directors and auditors - all of whom had duties to shareholders and potential shareholders.

Unfortunately, it might take a long time before an action can be brought.

Anonymous said...


Trading appears to be possible at the OTC market.

Is this the US OTC or a Hong Kong OTC ?
Is there a website with quotes ?

Thank You

traineeinvestor said...

Thanks for posting.

The short answer is that I do not know - I couldn't find anything which suggests that there is a way for retail investors to deal OTC in suspended shares.