On April 16, a lot of news came out of Kangmei Pharmaceuticals, or ST Kangmei (2.060,0.01,0.49%) (V.I.P.) (600518. SH).
The first is China’s first single securities dispute special representative litigation locked Kangmei Pharmaceutical; after that is ST Kangmei performance once again burst the lightning.
One day loss of 100 million SSE asked questions quickly
Significantly revised downward performance forecast loss of up to 29.9 billion yuan
In the evening of April 16, ST Kangmei released a performance forecast correction announcement, corrected the expected 2020 annual loss of 24.48 billion yuan – 29.92 billion yuan. Previously expected loss of 14.85 billion – 17.82 billion yuan.
It is worth noting that after this performance forecast correction, the company’s net assets are expected to be negative, and according to the regulations, the company’s shares are expected to be subject to delisting risk warning after the disclosure of the 2020 annual report.
Compared with the pre-loss announcement at the end of January, this short few months, ST Comet loss amount expanded by about 10 billion yuan, the announcement shows that the reason for the downward revision of results is mainly due to the increased impairment of inventory and other asset accounts.
ST Comet said that it had conducted impairment tests and made adequate impairment charges for goodwill, accounts receivable, fixed assets, construction in progress and inventories within the scope of the consolidated statements for 2020.
Among them, goodwill impairment is about 44 million yuan, credit impairment is about 1 billion yuan, engineering and fixed assets impairment is about 1.5 billion yuan, inventory impairment is about 20.3 billion yuan; in response to possible civil litigation claims from investors, the company has made a supplementary provision of 500 million yuan for contingent litigation expenses at the end of the period.
According to the loss on the line, almost every working day ST Comet has to lose 100 million, “work a day minus 100 million”, but also let the market fall.
Subsequently, the SSE followed up with a letter of inquiry. The focus is to explain the reasonableness of the relevant impairment only after the current period.
The SSE requested the listed company to explain the specific point of impairment signs, the reasonableness and prudence of the company’s late accrual of the relevant impairment until the current period, whether there is a situation of insufficient accrual in the previous period, and whether there is a situation of false performance or reconciliation of profits in the previous period.
In addition, the SSE also asked questions about the large amount of contingent litigation costs for investors’ civil litigation claims; whether the basis, process and results of the annual auditing accountant’s correction of the company’s performance forecast were appropriate and prudent; and whether the net assets are expected to be negative at the end of 2020 and the stock may be subject to delisting risk warning.
It is also expressed that ST Kangmei currently has large unresolved capital appropriation, large outstanding debts, involved in major litigation and other risk matters. Should fully disclose the current operating reality and the existence of many risk factors, clarify investor expectations, and do a good job in 2020 annual report disclosure, delisting risk tips and follow-up arrangements.
20 billion of inventory “disappeared into thin air”
Financial fraud again?
On April 16, ST Kangmei closed at 2.06 yuan per share, with a total market value of 10.25 billion yuan, and Choice data shows that as of September 30, 2020, ST Kangmei shareholders accounted for 159,100 households.
It is important to know that Kangmei Pharmaceutical, as a former white horse of medicine on A-shares, set a historical record of market value of 139 billion yuan on May 28, 2018.
Today is not what it used to be, less than three years market value is less than a fraction of the peak. What is the reason for everything?
The main thing is that at the end of 2018, Comet Pharmaceuticals was investigated by the SEC for illegal violations of letter disclosure.
The investigation found that during the period 2016-2018, Kangmei Pharmaceuticals allegedly inflated its operating income by about 30 billion yuan through counterfeiting and altering VAT invoices, and inflated its monetary funds by 88.6 billion yuan through counterfeiting and altering large term deposit certificates.
Long before the SEC opened a case for investigation, questions about financial fraud at Kangmei Pharmaceuticals kept emerging, and it was involved in many related cases, and there were also many problems with high monetary cash, double high deposit and loan, high shareholder stock pledge ratio, and high gross profit rate in Chinese herbal medicine trade.
From 2012 to 2018, Kangmei Pharmaceutical’s short-term loans increased from 1.5 billion to 12.452 billion yuan, an increase of more than 8.3 times, much higher than the increase in monetary funds; the controlling shareholder’s pledge ratio was as high as 99.53% and the obvious contradiction of abundant liquidity; the inventory balance grew from 9.7 billion yuan at the end of 2015 to more than 15 billion yuan in 2018.
At the same time, the amount of monetary cash held by Kangmei has increased year by year, but a large amount of money is not used to pay off debts, but placed in the bank to eat interest.
He said in the industry, “the money but not to pay off the debt but put in the bank to eat low interest indicates that the actual monetary funds do not match the book data, and may also be borrowing and debt led to the company’s financial situation is deteriorating.”
If we do not mention the past, the most noteworthy thing is the inventory impairment mentioned in the revised earnings forecast.
The global financial report shows that at the end of the third quarter of 2020, ST Kangmei’s inventory amounted to 30.680 billion yuan, and 20.3 billion yuan of impairment was directly charged, accounting for 66.17%.
At the same time, this up to 30.6 billion yuan of inventory also has a big origin.
In April 2019, when ST Comet released its 2018 annual report, there was an announcement of “Correction of Prior Accounting Errors” at the same time.
The announcement showed that due to errors in the accounting treatment of the company’s procurement payments, engineering payments and recognition of business payments, the company’s accounts receivable were understated by RMB 641 million, inventory by RMB 19.546 billion and construction in progress by RMB 631 million; meanwhile, due to errors in the company’s accounting for account funds, monetary funds were overstated by RMB 29.944 billion. After the correction, the inventory in 2017 was 35.247 billion yuan.
Although it has been characterized by the SSE in July 2020 as an inflated currency fund, it now appears that the inventory transformed in 2017 or by 29.9 billion yuan of currency funds “disappeared in thin air” in 2020 directly through the provision of impairment.
What is the intention of Kangmei Pharmaceutical to carry out the impairment as late as 2020? It is worth following up on.
There are still 160,000 shareholders at risk of delisting
Before the financial fraud explosion, there was an influx of investors
It should be mentioned that Choice data show that in 2018, when the share price and market value of Kangmei Pharmaceuticals were at a high point, the number of shareholders of the listed company was maintained at 100,000 households, but by the end of 2018, when the survey was launched, the number of shareholders had grown to 220,000 households, an increase of more than 120,000 households compared with the end of September 2018.
In other words, since October 2018 when the share price of Kangmei Pharmaceuticals began to collapse off a cliff, a large number of investors swarmed in until they were “buried”.
On April 16, the SFC announced that on that day, the Small and Medium Investors Service Center accepted more than 50 investors’ mandates to initiate a special representative action against Kangmei Pharmaceuticals.
The conversion of the ordinary representative lawsuit of Kangmei Pharmaceuticals into a special representative lawsuit was the first special representative lawsuit for securities disputes in China.
On the same day, ST Kangmei issued an announcement stating that on April 8, the CSI Small and Medium Investors Service Center said it accepted the special authorization of 56 rights holders, including Huang Meixiang, to apply to the Guangzhou Central Court to participate in the lawsuit as a representative.
Based on the number of 220,000 shareholders at the end of 2018, these 56 rights holders are only a tiny part of the vast number of investors; if the number of 160,000 shareholders at the end of September 2020, the biggest fear now is the risk of delisting.
After all, the key to this performance revision is that the net assets are expected to become negative, whether there is still a self-help channel for operational improvement is unknown, but the “Phi Beta Kappa” still can not escape.
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