China Solar Energy Says Directors Detained Amid Fraud Probe

China Solar Energy Holdings Ltd., the solar panel maker that’s lost 93 percent of its market value since 2007, said its chairman and two directors have been detained by Chinese authorities on allegations of fraud.

Chairman Yeung Ngo, Yang Yuchun and non-executive director Hao Guojun were arrested and have been held since Aug. 26, China Solar Energy said in a statement to the Hong Kong stock exchange on Oct. 18, citing its legal advisers. The company has been unable to contact them since August and is assessing the impact of the investigation on its financial performance, it said.

The disappearance of China Solar Energy’s directors and the fraud probe underscore investor concern that the business environment on the mainland is opaque and prone to corruption. Transparency International last week ranked Chinese firms lowest in a survey of public reporting practices in emerging markets, while short-sellers have targeted companies including Prince Frog International Holdings Ltd. and China Minzhong Food Corp.

“This is just another case of poor governance quality that is characteristic of this market,” David Webb, a former exchange director who founded local governance watchdog Webb-, said by telephone. “Why has it taken nearly two months for the company to figure out they couldn’t contact two of their directors and their chairman?”

China Solar Energy fell 11 percent to HK$0.18 on Aug. 16 before it asked for trading in the shares to be halted pending the release of an announcement about recent movement in the price. The company is valued at HK$277 million ($36 million), down from HK$3.7 billion at its 2007 peak. The shares will remain suspended, the company said in the Oct. 18 statement.

Solar Glut

The government in China, the world’s biggest maker of solar panels, announced measures in June to boost domestic demand for solar-generated electricity and provide easier financing to manufacturers to help ease a glut that’s made the industry unprofitable. The State Council also said it will encourage mergers and acquisitions and curb blind expansion in the sector.

Yeung Ngo, whose age was given as 62 in the annual report and accounts released July 30, joined the company in March 2011 and is the father of Yang Yuchun, according to the report. Yeung’s stake in the company fell to 14.6 percent in August from 15.8 percent after the company raised about HK$20.2 million in a private placement, according to an Aug. 13 filing, which didn’t name the purchasers of the shares.

Duties Suspended

Hao Guojun, whose age was given as 55, became a non- executive director in January 2013 and joined a unit named Dali Stream Solar Energy in 2008 as assistant chief engineer, according to his biography in the annual report.

The directors’ duties and functions have been suspended, although that won’t affect daily operations, China Solar Energy said in its statement. Three calls to the company’s offices in Hong Kong outside normal business hours were not answered and an e-mail was not returned.

China Solar Energy said in a Sept. 30 statement it had appointed two new executive directors, Sun Yanfeng and Guo Lijie, and an independent non-executive director, Zhang Jing.

Based on investigations into allegations made to the Hong Kong stock exchange against the company, one subsidiary in Changzhou had failed to pay a reported increase in its registered capital with the local authority by the due date, according to the statement.

The Dali Stream Solar unit, had failed to pay up its registered capital of $49.5 million, according to the statement. Its assets were frozen and documents were seized by the Dali public security bureau as part of a probe into a suspected false reporting of registered capital involving Yeung and Yang, the company said.

Audit Report

Both units risk having their business licenses revoked, according to the statement.

China Solar Energy received a clean audit from HLB Hodgson Impey Cheng Ltd. on June 28. A phone call and e-mail to the accounting firm outside of normal business weren’t immediately returned.

“Why didn’t HLB in its audit discover that the registered capital of its subsidiaries was not paid up, as the company now admits?” Webb said. “They have to answer questions about this.”

Deloitte Touche Tohmatsu resigned as the company’s auditor in February 2012 after taking into account the level of audit fees and its available internal resources, according to a company filing on Feb. 28, 2012, and HLB Hodgson Impey Cheng was appointed the next day. The firm was paid HK$1.38 million for audit services for the year ending March 31, according to the company’s annual report and accounts.

No Profit

China Solar Energy posted a net loss of HK$137 million for the year to March, compared with a loss of HK$247 million the year earlier, according to its annual report. The company hasn’t reported a net profit since at least 2004, according to data compiled by Bloomberg.

The company’s administrative costs doubled to HK$102.3 million in the 12 months to March from HK$49.6 million the year earlier, mainly due to an increase in consultancy fees, according to a statement dated Aug. 7. China Solar Energy hired 22 consultants during the period, including Pierre Seligman, who resigned as managing director of the company in January. Seligman quit as executive director of Viagold Capital Ltd. on Oct. 7, according to a statement to the Australian stock exchange.

Chinese Companies

In Transparency International’s report of 100 multinationals released Oct. 17, the 33 Chinese companies surveyed averaged a score of 2 out of 10 points. Eight of the 10 lowest ranking companies on the list were Chinese, including China National Chemical Corp. and China Shipbuilding Industry Corp.

Short-seller Glaucus Research Group has targeted Chinese companies this year, most recently Fujian province-based Prince Frog, a seller of adult- and child-care products including diapers. Trading in the shares was halted in Hong Kong on Oct. 16 as they plunged the most since listing in July 2011 after Glaucus questioned the company’s sales.

The short-seller, which has an office in Newport Beach, California, also targeted Minzhong Food, based in Putian, Fujian province. The Singapore-listed stock lost half its market value in less than two hours on Aug. 26 after Glaucus questioned the vegetable processor’s accounts. PT Indofood Sukses Makmur offered to buy the outstanding shares in the company it didn’t already own the following month.

Stock Discount

PetroChina Co., the nation’s most valuable company, said in August four senior managers had been removed amid an investigation by authorities. China Mobile Communications Corp., the state-owned parent of the world’s largest phone company by users, removed the head of its Guangdong unit who is under investigation, the company said Aug. 20.

The MSCI China Index of stocks available to international money managers is little changed this year, trailing a 17 percent rally by the MSCI All-Country World Index. The Chinese gauge trades at 10 times reported earnings, a 41 percent discount to MSCI’s global measure. In the past 20 years through July, foreigners earned less than 1.5 percent a year investing in Chinese stocks, a third of what they would have made owning U.S. Treasury bills.

“Chinese companies have been seen as having relatively weak corporate governance,” Lewis Wan, Hong Kong-based chief investment officer at Pride Investments Group Ltd., said by phone. “This is the reason why valuations of Chinese stocks are lower. The penalty on the mainland isn’t harsh enough to stop executives from committing frauds.”

Copyright 2013 Bloomberg

Lead image: Fraud via Shutterstock

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