Asia Sentinel

Who needs Sarbanes-Oxley: A sorry tale of duped investors that will leave a sour taste in the mouths of those wanting Hong Kong’s burgeoning stock market to rid itself of insiders squeezing the public

Last month the prices of both companies collapsed when OGC announced that auditors Price Waterhouse Coopers, appointed in January following the resignation of Moores Rowland International, had discovered assorted accounting irregularities following the disappearance of the financial controller. A provisional liquidator was subsequently appointed for OGH, which has a host of unlisted subsidiaries in businesses connected to aluminum extrusion.

Ocean Grand Chemicals: Bad July

Source: Quam Investor Relations

There are several noteworthy facts about the Ocean Grand collapse – facts which so far have received scant attention in a Hong Kong media often reluctant to tread on business toes. Yet the facts suggest that Hong Kong Stock Exchange’s so-called self-regulation is a sham, while the Securities & Futures Commission is a largely powerless bureaucracy.

The only regular independent voice investigating market shenanigans is the one-man investor-rights band of David Webb and his www.webb-site.com. Much of this report is based on Webb’s research.

In no particular order, three things stand out about Ocean Grand:

The names of the non-executive directors -- the rats jumping from the sinking ship soon after the PriceWaterhouse findings, mostly citing “personal” reasons. From OGH  came:

• Vincent Lee Kwan-ho, managing director of Tung Tai Securities, head of the Institute of Securities Dealers and a non-executive director of HK Exchanges & Clearing, the government-controlled stock and futures trading monopoly. His father is Leo Lee Tung-tai.
• Chau Po-fun, 88, a member of the board of CITIC and CPPCC National Committee delegate.
• Choy Tak-ho, also a CPPCC member.

And from OGC came:

• Yeh V-nee, chairman of Hsin Chong Holdings and founder of Value Partners, a fund management group which owns 7 percent of OGC.
• Cheung Yu-yan, a Liberal Party legislator representing the catering constituency.
• Wan Ngai-yin, a director of Yuanta Core Pacific Securities, an underwriter of the OGC IPO.
• Lo Wing-yan, a non-executive director of half a dozen listed companies.

From both boards came executive director Kwan Yan.

None of the above may be overtly to blame. But neither company held frequent board meetings and non-executive attendance was irregular. At the very least those who have lost money must feel that there was scant attention to their duties by well-paid non-executives. Both OGH and OGC held only two board meetings in the entire most recent reporting year. So much for the attention paid by the non-execs to their fiduciary duties.

Second:

The role of one Herbert Hui, executive deputy chairman of OGH and OGC since 2002. Hui has been a prominent figure in the financial world for many years. Influence came relatively young as head of the powerful Listing Committee of the Stock Exchange until 1997. His subsequent career has however been less stellar, at least for shareholders in the companies with which he has been associated – Guangdong Investment, an early China whiz-bang stock, then SunEvision, a dotcom era shooting star, then Interchina Holdings, which has lost more than 85% of its peak value. Whatever his precise role, his close association with this latest disaster, OGC, is beyond question.

Despite this long record of losing money for outside shareholders, Hui  was, until OGC blew up, chairman of the Hong Kong Institute of Directors.

His wife Ho Man-kay is a lawyer with PC Woo & Co,  a big local law firm whose senior partner is Cheng Mo-chi, former chairman of the Listing Committee, Hui’s predecessor as chairman of the Institute of Directors, and a government-appointed director of HK Exchanges & Clearing. Ho was also a director of Kingsway Capital, a joint sponsor of OGC’s listing. OGC conveniently had its one-year listing deadline extended by the Listing Committee and it eventually took place in June 2003.

Third:

The past record of OGH and its listed subsidiary.

OGH itself had had a rather checkered career following its 1997 listing,  including lawsuits between directors and the startup of a now-defunct  web search site claimed in an OGH circular to be assessed by a valuer at 1.2 billion yuan. Complicating matters, auditors changed several times and subsidiaries often had different auditors from the parent and OGH and OGC had different year-ends.

As for the nature of OGC’s business at the time it was floated, Webb drew attention to public data which should have raised eyebrows long ago about the quality of its earnings and hence of its fitness for listing, let alone the rationale behind its parent’s bond issue. OGC’s 2003 prospectus showed that in the three years prior to listing, 81 percent of its profit came from the processing of palladium salt. Even though this activity was actually  outsourced to a mainland firm, OGC’s gross profit margins exceeded 80 percent. 

OGC subsequently established its own processing plant in Zhuhai, across the border from Macao, and its profit margin rose even higher – to more than 90 percent. Meanwhile however, trade receivables ballooned to HK$343 million, of which nearly half were more than three months old.

These remarkable numbers presumably had explanations acceptable to the then auditors, to Hui, to the non-executives, and to those at ABN-Amro conducting due diligence on behalf of the prospective bond investors.

But whatever is subsequently revealed it is a sorry tale. It will leave a sour taste not only in the mouths of duped investors but of all those who want the Hong Kong market to mature and flourish and not be treated as a way for insiders to squeeze the public.

Mutual back-scratching in Hong Kong is rife. It is possible because of the incestuous links among big business groups and their co-option of bureaucrats too timid (or perhaps too venal) to give powers of surveillance to an independent SFC. Time and again vested interested have defeated proposals from the government and the SFC to tighten regulation, improve disclosure standards etc. Add in the money and political connections of mainland spivs and more disasters are in the making – particularly if credit ceases to grow at 20 percent a year.

On the score of market trustworthiness Hong Kong fails dismally in its claims to be almost on a par with New York and London. Indeed, it is troubling for the longer term future that Hong Kong’s success in attracting new issues is either because the mainland market remains largely closed to foreigners and Hong Kong is free not just of the rigors of Sarbanes-Oxley but even of Singapore-level oversight.

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