China Metal Recycling (773 HK)

CMR claimed to be the largest scrap metal recycling company in China when it listed in June 2009. Glaucus Research issued a report[1] in January 2013 claiming this was a lie. The report alleged that CMR had massively overstated revenue, pointing to its exponential revenue growth (CAGR of 117% over five years), huge discrepancies between the company’s figures and official import data, and other inconsistencies in operating statistics. At 1H12, receivables of RMB13bn were nearly double shareholders’ equity. The company’s shares were suspended in January 2013. The company was placed in provisional liquidation in July 2013. The court’s judgment[2] in relation to the winding up found evidence of “fraud on a massive scale” dating back to before the IPO. It involved cash recycling: cash paid by the company to suppliers was transferred to customers and then paid back to the company. The court described a carefully planned and implemented scheme to overstate revenue and profits. The finger of blame was pointed squarely at Chun Chi Wai, the company’s chairman and controlling shareholder.

An early warning sign was the resignation of the CFO in November 2009, shortly after the IPO[3]. Mr Wong, an experienced executive, had raised certain (undisclosed) issues with the company’s audit committee. The company’s board dismissed allegations after receiving “verbal confirmation” from senior management. It also denied that Mr Wong had been prevented from accessing the company’s financial information, which it said was due to a “security upgrade” which had “temporarily disabled computer access”.

[1] Glaucus Research: China Metal Recycling Holdings Ltd, 28 Jan 2013

[2] High Court of HKSAR: In the matter of China Metal Recycling (Holdings) Limited, 9 Mar 2015

[3] China Metal Recycling: Resignation of Executive Director, 17 Nov 2009

China Metal Recycling: Interim Report 2012Annual Report 2011

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