China Sports (CSPORT SP)

China Sports designed, manufactured, and sold branded sports fashion footwear and apparel products in China under the Yeli brand. In FY08, footwear accounted for 81% of sales, and apparel and accessories 19%. It listed in Singapore in 2007, raising RMB417m. Profit peaked in FY08, before steadily declining over the next five years, finally resulting in losses by FY13. In November 2013, Foo Kon Tan Grant Thornton resigned[1] as auditor (claiming that there were no disagreements) and RT (an obscure auditor) was appointed. Another warning sign was the rotation of CFOs with Ang Suk Ching resigning in July 2014, citing pregnancy complications, and then Alex Hund just four months later for better career opportunities. In April 2015, RT issued[2] a going concern disclaimer for FY14 financials citing concerns over receivables and payables. Financials were also qualified for FY15.

The company triggered all four red flags under our Fake Cash Flow model from FY07 through to FY11. The company reported a number of one-off charges which suggested it had been overly aggressive in past revenue recognition, including a RMB252m subsidy to distributors in FY13 and a RMB481m impairment against receivables in FY15. The company has been suspended since November 2017 when it announced[3] that it was facing a lawsuit for failing to pay a fee of S$50,000 for corporate advisory work, despite being in a net cash position with RMB159m in the bank. We suspect that the company faked sales and profits between FY07-FY11 in order to raise capital which has since been siphoned off.

 

REFERENCE:

[1] SGX: Proposed change of auditor, 15 Nov 2013

[2] SGX: Auditor’s comments of Accounts, 14 Apr 2015

[3] SGX: Statutory demand from RHT Corporation Advisory, 18 Dec 2017

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