Hall of Shame

Health Care

China Medical System Holdings Ltd (867 HK)

Year: 2020

China Medical Systems Holdings Ltd. (CMS), a Chinese company, is a specialty pharmaceuticals company. The company manufactures various dosage forms such as powder, oral solution, small-volume injections, tablets, hard capsules, and others. Its product portfolio includes Plendil; Deanxit; Salofalk; Augentropfen Stulln Mono; Combizym; Yinuoshu; Xidakang; Imdur; Elcitonin; YinlianQinggan Granules; Nuodikang Capsules; Hirudoid and others.

It listed on the London AIM Exchange in June 2007 and raised £10M, In May 2010, in an additional share offering, it raised another £71K. In September 2010, it listed on the Hong Kong Exchange raising HK$1.13B in it's IPO. Additional share offerings  raised HK$1.72B in March 2015 and HK$1.22B in September 2017.

February 22, 2018 GMT Research, in a report "TICKING TIME BOMBS -Stocks with similar traits to Steinhoff " noted that, after screening 35,000 large companies for traits similar to Steinhoff, there were five companies of major concern.  One of these was China Medical Systems. The report stated "CMS has a high volume of related party transactions with associate Tibet Pharma which is also the supplier of some of CMS’s most important drugs. Tracking the transactions between the two companies raises concerns, as does CMS’s continuous additional funding to its associate and different auditors for each company. CMS also uses a tax haven to avoid PRC tax and may be under-amortising its drug licenses."

February 6, 2020 Short-sellers Blue Orca Capital issued a report on China Medical systems. In the report it stated that in their opinion, evidence suggests that:-

              -  the Company exaggerates its financial performance,
              -  inflates profits and
              -  conceals that dwindling Company profits are used to privately enrich its chairman.

It says given the overwhelming evidence suggesting that CMS misleads investors, Blue Orca believe that CMS is simply uninvestable. 

February 7, 2020 China Medical Systems responds to the report saying that the Board vigorously denies the allegations contained in the Report and considers them to be completely unfounded and gravely misleading, and that the conclusions drawn in the Report about the Company and its financial results are incorrect. It addressed the allegations in the clarification.

February 10, Blue Orca Capital issued a counter rebuttal report calling CMS's response incomplete and contradictory. In the second report it added further analysis and evidence to confirm the findings in their first report.

February 10, GMT Research in a review on Blue Orcas Report ,"CHINA MEDICAL SYSTEM (867 HK) - Faking profits or avoiding taxes?" , concluded "We believe CMS’ subsequent rebuttal effectively confirms that it has, at best, minimal operations in Malaysia, which suggests this subsidiary is little more than a letterbox used to avoid PRC taxes. Investors are faced by a dilemma: CMS is either faking half its profits, or it is avoiding significant taxes in the PRC via a structure which may prove unsustainable. While there is insufficient evidence to conclude on either possibility, underlying earnings expectations may need to lowered substantially.

February 10, 2020  China Medical Systems responded to the second report saying that the allegations were similar to the first report and it strongly denied all the allegations.

GMT Research: TICKING TIME BOMBS -Stocks with similar traits to Steinhoff, 22 Feb 2018
Blue Orca: Blue Orca is Short China Medical System Holdings,  6 Feb 2020
China Medical Systems: Clarification Announcement, 7 Feb 2020
Blue Orca: Rebuttal to China Medical System Holdings, 10 Feb 2020
GMT Research: CHINA MEDICAL SYSTEM (867 HK) - Faking profits or avoiding taxes?, 10 Feb 2020
China Medical Systems: Annual Report 2018
China Medical Systems: Annual Report 2017
China Medical Systems: Annual Report 2016