Hall of Shame
China Metal Resources Utilization (1636 HK)
China Metal Resources Utilization Limited, (CMRU), a Hong Kong company, was principally engaged in the manufacture and sales of copper and related products. The Company operated its businesses through four segments. The Recycled Copper Products segment was engaged in the manufacture of recycled copper products by using scrap copper and electrolytic copper. The Power Transmission and Distribution Cables segment was engaged in the manufacture and sales of power transmission and distribution cables. The Communication Cable segment was engaged in the manufacture and sales of communication cables. The Aluminium Product segment was engaged in the sales of aluminium products.
Originally a biodiesel producer called Gushan Environmental Energy, the company listed in New York in 2007 with a valuation of $800 million. As demand for fuel dried up, Gushan turned itself into a manufacturer of copper wires and other products from scrap cars. Amid low liquidity in its shares, Chairman Yu Jianqui took the company private in October 2012 at a valuation of just $30.7 million.
CMRU listed on the Hong Kong Exchange (HKEx) in February 2014 raising HK$706.57M. Yu did not sell any of his shares and owned 45.7 percent of CMRU after the IPO.
May 17, 2020 Hindenburg Research released a critical report on CMRU; "China Metal Resources Utilization: 100% Downside to This Zombie Company". The main issues that Hindenburg raised were:
- It believed that China Metal Resources Utilization was nothing more than a ‘zombie company’; an entity technically alive, but under such severe financial distress and laden with so many red flags, that insolvency seemed inevitable.
- It believed CMRU’s Chairman/CEO had reached the same conclusion: he had disclosed agreements indicating his intention to offload his entire personal stake in the company, which represented about 29.65% of the company’s outstanding shares.
- The company’s Chairman/CEO had a history of allegations of inflating revenue and margins at his previous company, Gushan Environmental (古杉环保), which subsequently saw its valuation implode before it was taken private at a price 96% below its IPO price. CMRU was pieced together with the wreckage of Gushan. One media report called CMRU the “rebirth” of Gushan.
- CMRU’s financials painted a picture of a company in financial turmoil. At the time, recent filings showed the company had cash of RMB 64.7 million versus RMB 1,559 million in borrowings due “within one year or repayable on demand”, at an average interest rate of 13.72%.
- The company had not repaid loans that looked to have matured in 2016 and appeared to have also missed a bond payment due in August 2019 on another loan, before being granted a short-term extension late last month.
In conclusion Hindenburg believed that China Metal Resources Utilization would suffer a similar fate to its predecessor, Gushan: a near-total annihilation of shareholder value.
May 19, 2020 CMRU issued a Clarification Announcement in response to the Hindenburg report. It said the Research Report attempted to portray or lead readers to draw certain conclusions about the Company, which in the Company’s view, was either incorrect or misleading in nature. Also that on a number of occasions, selective information and possibly misleading when considering these selective information in isolation was used in the Research Report ignoring other information which had been published by the Company. The Company took the view that the analysis presented was simply illogical or wrong. It then responded in detail to some of the allegations.
Breaking Views: China copper IPO seeks gold in financial recycling, 18 Feb 2014
Hindenburg Research: China Metal Resources Utilization - 100% Downside to This Zombie Company, 17 May 2020
CMRU: Clarification Announcement, 19 May 2020
CMRU: Annual Report YE Dec.2018
CMRU: Annual Report YE Dec.2017