Fujian Nuoqi (1353 HK )

Fujian Nuoqi is a mainland Chinese men’s fashion retailer, operating primarily through franchisees. It was listed in Hong Kong in January 2014, after two unsuccessful attempts to list on the mainland. It raised around RMB250m (US$40m) in the IPO. Unusually, Nuoqi is incorporated in mainland China.

In July 2014, the company’s share price collapsed as rumours began to circulate that Ding Hui, the company’s Chairman and largest shareholder (with a 34% stake), had disappeared. Initially, the company denied any knowledge about the share price drop, although, interestingly, the stock exchange announcement was signed by his brother, Ding Canyang, who was also a director, rather than the Chairman. The share price more than halved in three days. The shares were eventually suspended on 23 July. Two days later, the company announced that they had been unable to contact the Chairman for several and he had been reported as missing to the Hong Kong police. At the same, it was announced that Nuoqi’s 31-year old CFO was resigning as a director “due to health problem”, just a month after he became a director, although it seems he was well enough to remain as CFO.

On 31 July 2014, Nuoqi revealed that Ding Hui had transferred around RMB65m (US$10m) out of the bank account of a Hong Kong subsidiary to a non-company account in the BVIs; a further RMB163m had been transferred to an account in mainland China.[1] The company subsequently disclosed that various financial institutions in China had lent RMB455m (US$73m) to external parties (including relatives and friends of the Chairman) secured by guarantees from the company and pledged cash deposits (including the transferred RMB163m discussed above). The institutions had since demanded repayment of the loans.

No financial results were produced for several years. Moreover, it seems that Nuoqi’s original auditor, Ernst & Young, no longer wanted their name associated with the company. They resigned in late 2016 and were replaced by Zhonghui Anda. Results up to 2016 were only released in 2017, although the auditor’s qualified opinion was unable to say whether the results gave a true and fair view. Indeed, “insufficient supporting documents and explanations” suggest the financials are largely a best guess.

Problems pre-date the share suspension. The company recorded losses of RMB227m from writing off the interest in its Hong Kong subsidiary. We assume this is the transferred amounts discussed above, which are probably the IPO proceeds. The company also recorded RMB94m of impairment losses on trade receivables, which nonetheless still increased from RMB79m to RMB129m. These are mainly amounts owed by franchisees; it suggests that these in effect stopped paying in 1H14. Why this is the case (and it is worth remembering this is before the problems were uncovered) is not clear. For the full-year, the company recorded losses of RMB479m relating to the Chairman’s actions and RMB205m of impairment losses on trade receivables, other receivables and prepayments. Again, no explanation is provided, nor even a breakdown. Trade receivables actually declined from RMB79m to RMB8m despite an RMB108m cash outflow, which suggests an impairment charge of RMB179m. Prepayments ballooned by around RMB104m to RMB254m. There was a cash outflow of more than RMB700m in 2014 from these items. The prepayments were largely written down in 2015.  No real explanation has been forthcoming. Meanwhile, the underlying business collapsed: revenue in 2016 was just RM4m down from RMB682m in 2013.

[1] SCMP: Fujian Nuoqi red flags should have been spotted before IPO, analysts say, 27 Aug 2014

Fujian Nuoqi: Annual Report 2014

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