Hall of Shame

Consumer Discretionary

China Harmony Auto Holding Ltd (3826 HK)

Year: 2020

China Harmony Auto Holding Ltd, formerly China Harmony New Energy Auto Holding Ltd, is an investment holding company principally engaged in the sale of motor vehicles and the provision of motor vehicles related services in Mainland China. The Company operates the Sale of Motor Vehicles and the Provision of Related Services segment. The Company is mainly engaged in the sales of high-end luxury cars, including BMW, Lexus, MINI, Land Rover, Volvo, Infiniti, Rolls Royce, Aston Martin, Ferrari, Maserati and more. The Company mainly conducts its businesses in Mainland China.

The company listed on the Hong Kong Stock Exchange in June 2013 raising HK$1.67B in it's IPO. Additional share offerings raised a total of HK$550.04M; (Jan.2015: HK$547.89M, May.2015: HK$2.15M).

In May 2015, the company changed it's name to China Harmony New Energy Auto Holding Limited.

January 24, 2020 The company announced a change in it's audit team. E&Y would no longer do the Annual Audit but would audit mergers & acquisitions. Zhonghui Anda was appointed to do the Annual Audit and also mergers & acquisitions. KPMG were also appointed as auditor of mergers & acquisitions and potential financing activities.

In June 2020, the company reverted it's name back to China Harmony Auto Holding Limited.

July 13, 2020 Zhonghui resigned as the annual auditor and changed to the auditor for acquisitions and mergers as well as potential financing activities.

July 17, 2020 Deloitte Touche Tohmatsu was appointed as the auditor of the Group.

November 12, 2020 Bonitas Research published a short report on China Harmony Auto Holdings. Bonitas said that evidence revealed that Harmony’s Chairman Feng defrauded investors and fabricated Harmony’s financial statements. The report highlighted the following issues:

  • At the end of 2019, Harmony offset a RMB 1B cash loan to Chairman Feng using a tax liabilities transfer. This transaction had serious negative repercussions for Harmony minority shareholders as it effectively erased the contractual obligation for Chairman Feng to repay RMB 1B to Harmony. 
  • Harmony claimed to receive RMB 192M in cash from selling shares of Henan Hexie Automobile Aftersales Services Co., Ltd in April 2019. This never happened. In addition, Chinese filings revealed that Harmony never received RMB 347M in cash from the sale of Green Field Motor Co., Ltd. To Bonitas, these findings suggested that Harmony’s cash balance had been fabricated since 2015.
  • Bonitas believed that Harmony lied about its profits in two ways: by failing to consolidate operating expenses from primary subsidiaries, and failing to write down losses from bad investments.
  • Ernst & Young resigned as Harmony’s auditor in January 2020.  Their replacement, Zhonghui Anda, resigned in July 2020. Bonitas suspected both resignations were related to the write-off of the RMB 1 billion loan to Chairman Feng.
  • CCASS data showed that 94% of Harmony’s shares were in circulation despite Chairman Feng’s reported 44% ownership.  This suggested undisclosed share pledges.

Based on the above, Bonitas believed China Harmony Auto was a fraud and believed its stock was worthless.

November 13, 2020 China Harmony issued a clarification announcement strongly refuting the allegations. It responded to five of the allegations in particular.

November 13, 2020 Bonitas issued an open letter to Deloittes, the company's current auditors. In it Bonitas stated that it suspected both resignations, of the previous auditors, were related to the write-off of the RMB 1B loan to Chairman Feng. It referred Deloittes to its report and said it hoped Deloittes would do the right thing and walk away.

November 16, 2020 Bonitas issued an update report, "The Overworked Auditor Excuse" in response to China Harmony.  It covered:

  • Bonitas rejected the China Harmony's answer re auditors saying that to think that a Big 4 auditor could not handle additional audit work beyond its primary audit responsibilities was ridiculous. Especially when Harmony had zero business combinations in either 2018 or 2019 and only spent RMB 154 million on acquisitions so far in 2020.
  • Bonitas asked if it was possible to get away with not paying Chinese Authorities taxes for 15 years.  It said that China Harmony needed to explain how RMB 1B of cash went to Chairman Feng and why he doesn’t have to pay it back anymore. 
  • Following share purchases by the company / Chairman in the previous few days Bonitas did not believe that these were made because of Chairman Feng’s confidence in Harmony’s growth story. Instead, it continued to believe that Chairman Feng maintained undisclosed pledges against Harmony shares.
  • Bonitas believed that Harmony lied in the FMC Announcement to avoid shareholders’ scrutiny and approval, or Harmony lied in Harmony’s response to its report. Both would constitute clear breaches of listing rules. 

November 16, 2020 China Harmony released a voluntary announcement.  In response to the allegations by Bonitas, which suspected Feng Changge of having an undisclosed share pledge, that after verification with the depository institution, the Board of Directors proved that, as of November 13, 2020, all the shares deposited by the controlling shareholder in the depository institution had no pledge. China Harmony said there was no so-called undisclosed share pledge by the controlling shareholder.

China Harmony Auto: Change Of Auditor, 24 Jan 2020
China Harmony Auto: Change Of Auditor, 17 Jul 2020
Bonitas Research: China Harmony Auto - Short, 12 Nov 2020
China Harmony Auto: Clarification, 13 Nov 2020
Bonitas Research: Open Letter to Deloitte Regarding China Harmony, 13 Nov 2020
Bonitas Research: The Overworked Auditor Excuse, 16 Nov 2020
China Harmony Auto: Voluntary Announcement, 13 Nov 2020
China Harmony Auto: Annual Report YE Dec. 2019
China Harmony Auto: Annual Report YE Dec. 2018