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. It mainly conducts its businesses in mainland China.

China Harmony Auto Holding Limited 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$550m; (Jan.2015: HK$547.89m, May.2015: HK$2.15m).

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

24 January 2020, the company announced a change in the 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 its name back to China Harmony Auto Holding Limited.

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

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

12 November 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, China Harmony offset a RMB1b cash loan to Chairman Feng using a tax liabilities transfer. This transaction had serious negative repercussions for China Harmony minority shareholders as it effectively erased the contractual obligation for Chairman Feng to repay RMB1b to China Harmony. 
  • China Harmony claimed to receive RMB192m 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 China Harmony never received RMB347m in cash from the sale of Green Field Motor Co., Ltd. To Bonitas, these findings suggested that China Harmony’s cash balance had been fabricated since 2015.
  • Bonitas believed that China 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 China 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 RMB1b loan to Chairman Feng.
  • CCASS data showed that 94% of China 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 was a fraud and believed its stock was worthless.

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

13 November 2020, Bonitas issued an open letter to Deloitte, 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 RMB1b loan to Chairman Feng. It referred Deloitte to its report and said it hoped Deloitte would do the right thing and walk away.

16 November 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 China Harmony had zero business combinations in either 2018 or 2019 and only spent RMB154m 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 China Harmony’s growth story. Instead, it continued to believe that Chairman Feng maintained undisclosed pledges against China Harmony shares.
  • Bonitas believed that China Harmony lied in the FMC announcement to avoid shareholders’ scrutiny and approval, or China Harmony lied in its response to Bonitas' report. Both would constitute clear breaches of listing rules. 

16 November, 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.

11 December 2020, The company announced that it had established an Independent Board Committee (IBC), composed of its independent directors, to review the issues alleged in the Bonitas report. The IBC retained an Independent consultant to do the forensic work.

8 January 2021, Deloitte resigned as auditors. It and the company disagreed as to when the audit of the 2020 financials should commence. Deloitte believed it should not start the work until the investigation was complete. China Harmony believed the work should be done in parallel with the investigation. Zhonghui were re-appointed as auditors.

August 10 2021, China Harmony released the key findings of the investigation report. After reviewing the report the IBC concluded that all the allegations were incorrect. It also made various suggestions to the Group as to how the corporate governance of the Group could be improved.

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, 16 Nov 2020
China Harmony Auto: Change Of Auditor, 8 Jan 2021
China Harmony Auto: Key Findings Of The Independent Investigation, 10 Aug 2021
China Harmony Auto: Annual Report YE Dec. 2020
China Harmony Auto: Annual Report YE Dec. 2019
China Harmony Auto: Annual Report YE Dec. 2018