Tianhe (1619 HK )

Tianhe Chemicals is a manufacturer of speciality chemicals. It listed in 2014 and at one point had a market value of US$8bn. A key attraction was its speciality fluorochemicals (SFC) division, which enjoyed rapid sales growth and high gross margins, 84% in 2013. The division’s high margins meant it contributed over 80% of gross profit in 2013. A key product was anti-reflective coatings used on smartphones and tablets.

Anonymous Analytics (AA) published a report in September 2014[1] alleging that Tianhe had overstated its revenue and profits through bogus sales to undisclosed related parties. Tianhe issued a rebuttal, denying AA’s allegations[2]. When trading in shares which had been suspended resumed, the share price fell xx%.

On 26 March 2015, Tianhe announced that publication of its 2014 results would be delayed and requested a suspension in trading of its shares, which have remained suspended since then. The auditor, Deloitte had concerns regarding construction-in-progress, sales to Tianhe’s largest customer (CITIC International) and certain bank statements[3]. Deloitte’s draft audit report contained a disclaimer opinion. When this was rejected by the company, Deloitte resigned in September 2015 and were replaced by Zhonghui Anda. To date, no audited financial reports have been published for 2014, 2015 or 2016. One of the Hong Kong Exchange’s conditions for a resumption of trading was a forensic investigation of the matters raised by Deloitte. Grant Thornton delivered a clean opinion in October 2016, albeit with significant scope limitations[4].

Meanwhile, unaudited results produced by Tianhe show a collapse in revenue which more than halved between 2014 and 2016. It seems that decline is entirely attributable to the SFC division as revenue at the lubricant additives business increased during this period. Total net profit in 2016 was a quarter of that in 2014. The company blamed the problems in the SFC business on the economy in 2015 and disruption caused by the forced relocation of its manufacturing operations in 2016. It seems that the SFC business has shrunk almost to nothing. The suspicion is that inflated spending on PP&E was used to offset fictitious revenue. Construction-in-progress and prepayments for fixed assets were nearly RMB5bn at the end of 2013, around two-thirds of total fixed assets, primarily for a new lubricant additives manufacturing plant.

[1] Anonymous Analytics: Tianhe Chemicals, 2 September 2014

[2] Tianhe Chemicals: Clarification Announcement and Resumption of Trading, 8 October 2014

[3] Tianhe Chemicals: Update on Suspension of Trading and Information Relating to the Annual Results, 14 August 2015

[4] Tianhe Chemicals: Key Findings of the Forensic Investigation, 31 October 2016

Tianhe Chemicals: Interim Report 2014Prospectus

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