(Oct 2): In 2008, the year Beijing hosted the Summer Olympic Games, a rather less important sporting event called the National Peasants’ Games was held in Quanzhou, a city in China’s Fujian province.

Quanzhou and its surrounding towns are home to numerous producers of sports shoes and apparel. Among them is a company that had listed on the Singapore Exchange in 2005, called China Hongxing Sports.

Yet, Wu Rongzhao, then CEO of China Hongxing, told The Edge Singapore at that time he wanted nothing to do with the National Peasants’ Games.

The brand of sport shoes the company made — called Erke — was targeted at China’s increasingly wealthy urban middle class rather than the country’s rural population. The premium positioning of its products was a key reason investors were excited about China Hongxing, and it drove the company’s market valuation to a peak of $3.4 billion in October 2007.

It was only a matter of two years before China Hongxing would lose most of its prestige and value, though. The trouble started in early 2009, with talk in the market that the company did not have as much in the bank as its books stated.

Its auditors, RSM Nelson Wheeler and Foo Kon Tan Grant Thornton, quit just two months before the year-end audit was to begin. Then, its new auditor, EY, discovered accounting irregularities. By February 2011, its shares had been suspended. At its last traded price of 11.5 cents, the company had a market value of only $322 million.

A special auditor, nTan Corporate Advisory, did a thorough investigation and discovered that China Hongxing only had cash and bank balances of RMB263 million at end-2010 instead of the RMB1.42 billion originally stated.

The special auditor also uncovered several failures of internal controls. Wu resigned as CEO in August 2013, while his brother Wu Rongguang stepped down as chairman in December 2016.

Now, it seems that China Hongxing’s operating assets are not worth as much as their book value either.

On Sept 21 this year, a company called Jiayao Investments, which is controlled by the Wu family, made an offer to acquire the operating assets of China Hongxing for RMB100 million ($20.4 million). The assets are carried in the company’s books at RMB470.7 million.

The bulk of the RMB100 million offer consists of a waiver of debt owed to the Wu family of about RMB64.4 million. The Wu family is actually only proposing to hand over cash of RMB28 million to China Hongxing. This cash is then to be distributed to shareholders of China Hongxing. The Wu family, which owns 33% of China Hongxing, has renounced its entitlement to this distribution.

So, a minority investor stands to get RMB0.0149, or $0.00299, a share. Or, to put it another way, a minority investor holding 1,000 shares in China Hongxing will get a total of $2.99.

China Hongxing says in an announcement that if this deal is approved by shareholders, it will become a “cash company”, which will make it easier for it to be sold as a reverse takeover vehicle.

“A reverse takeover exercise would typically result in a premium to be paid to the shareholders of the listed company by the incoming private company due to its listing status. Accordingly, the directors believe that the proposed disposal and the prospect of a subsequent reverse takeover represent a potential gain to the shareholders from the premium over and above the fair value of the company,” the company adds.

IFA required June Sim, head of listing compliance at SGX, says the exchange cannot comment on specific companies, but interested party transactions — such as the one tabled by the Wu family — require the appointment of an independent financial adviser.

The IFA, in turn, will determine whether the transaction is on “commercial terms” and “not prejudicial” to the interests of the company and its minority shareholders.

“Minority shareholders will have an opportunity to vote on the transaction at an EGM, taking into account the opinion of the independent financial adviser as well as the opinion of the company’s audit committee,” adds Sim.

China Hongxing had previously put forward proposals intended to get the suspension of its shares lifted. However, on Aug 29, 2014, the company said its subsidiaries did not have the financial resources to meet conditions for the resumption of trading.

In October the same year, the company said an unnamed party was considering making a delisting offer. On May 3, the company said that the potential offer, which was for its China assets and businesses, was unlikely to happen; it did not give a reason for this.

Photocopies of bank statements In 2008, China Hongxing was covered by several brokerage firms, including foreign houses such as Deutsche Bank and Credit Suisse. Its shareholder roster included institutional investors like Fidelity, State Street, JP Morgan and Pacific Mutual. Its second-largest shareholder after the Wu family was pension fund manager Teachers Insurance and Annuity Association.

On top of all this, China Hongxing was named together with Beauty China as runners-up among foreign listings for “Most Transparent Company” by the Securities Investors Association (Singapore).

One concern that investors had, however, was that China Hongxing appeared to be sitting on a mountain of cash that it refused to pay out or invest. The reported cash pile stood at RMB1.98 billion at end-2008, a year when it had paid dividends of only RMB38 million.

In March 2009, the company attempted to dispel the concerns by passing out purported photocopies of its bank statements to analysts and reporters who attended its briefings. Yet, the company’s reported cash position swelled further to RMB2.98 billion by end-2009, a year it paid only RMB56 million in dividends.

China Hongxing was not the only Fujian-based sportswear maker listed in Singapore that was discovered to have accounting irregularities.

In 2014, it was found that RMB646 million of cash reflected in the books of Eratat Lifestyle was not held in its bank accounts. The company, which used to be called China Eratat, was later deemed to be “hopelessly insolvent” by its liquidators. It was delisted in June this year.

One local-listed Fujian-based sportswear maker that is still functioning is China Sports International. The company was listed in 2007, and its second-largest shareholder is currently massage chair maker OSIM International, which holds an 18.69% stake. However, this stake is not worth much at the moment. Shares in China Sports are trading at just 0.1 cent, putting the company’s market value at $12.7 million.

China Hongxing gets offer for operating assets at fraction of their book value

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