Fuguiniao (1819 HK)

Shoe manufacturer and retailer Fuguiniao listed in Hong Kong in 2013. In FY15, the company reported that it had 2,960 retail outlets through 60 distributors across China (of which 255 outlets were directly operated and the rest were franchises). Footwear accounted for 84% of sales and accessories 16%. In August 2016, the company announced that it needed more time to finalise interim results; shortly thereafter, it asked for its shares to be suspended. In late September, the company disclosed that in the preparation of 1H16 results, it had discovered that the company “might have provided certain guarantee for related/connected party(ies)”. The board then appears to have fired its independent directors, replaced its Hong Kong auditor (KMPG with Elite Partners) and then attempted (but failed) to take the company private. After the establishment of an internal review under the auspices of Pan-China in August 2017, the consultant disclosed in March 2018 that it wished to issue a disclaimer with regards to certain assets, including deposits, receivables and other financial assets. This suggests that the company had been engaged in faking its past revenues which had been parked in these assets.

The company triggered three out of four red flags under our Fake Cash Flow model in FY13 and FY14. The only reason it did not raise all four red flags is because it paid out more than 40% of profits as dividends. Most frauds are unable to pay dividends because revenues and cash balances have been faked. However, Fuguiniao’s dividends of RMB579m between FY13 and FY15 appear to have been financed through RMB985m of new debt issuance and RMB906m of new equity. As a result, the company triggered our Excess Capital red flag. This is raised when companies generate too much external capital relative to requirements. Between FY10 and FY15, the company generated RMB2.6bn in surplus capital, equating to 26% of sales of over the period, in the highest 97th percentile relative to industry peers. This is, once again, a common trait of frauds. The company was audited by KPMG.

Fuguiniao: Annual Report, 30 Mar 2016

Fuguiniao: Suspension of Trading, 22 Sep 2016

Fuguiniao: Mandate to repurchase shares, 15 May 2017

Fuguiniao: Changing of Auditor, 22 Nov 2016

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