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Huarong Under Fire Again for Alleged Fraud After Hong Kong Exchange Freezes Assets

A few months after Huarong’s chairman resigned while being investigated for corruption, two alleged cases of fraud involving China's largest bad debt manager have emerged.

Anna Vodopyanova
    Oct 08, 2018 1:05 PM  PT
Huarong Under Fire Again for Alleged Fraud After Hong Kong Exchange Freezes Assets

New possible cases of fraud have emerged recently involving China Huarong Asset Management Co. Ltd. (HKEX: 2799), China's biggest bad-debt manager.

A few months after Huarong's top executive resigned on allegations of graft, two alleged cases of fraud involving the company have emerged recently, which may have lost the giant more than $1 billion, as reported by Caixin Global news agency.

Last month, Hong Kong's Securities and Futures Commission ordered three brokers to freeze $1.3 billion of assets of an undisclosed public company. Although the agency did not provide names, a report dated Oct. 1 by shareholder activist and veteran investment banker David Webb claimed that the owner of the frozen assets was Zhihui Yang, the chairman of a casino operator, Landing International Development Ltd., whom the company reported has been missing since August.

In his report, Webb described two transactions connecting Yang and Huarong, which might have led the latter to lose an accumulated HK$10.17 billion. Both transactions involved Huarong's acquisition of shares in certain companies from Yang in deals unfavorable to the purchaser, Webb said.

"It is reasonably suspected that the true purpose was to enable the person to profit from the transaction at the expense of the group," the Commission said in its statement.

The case comes after another scandal placed the state-backed Huarong, which has been handling distressed assets in China since 1999, under government scrutiny.

In April, the chairman of the company, Xiaomin Lai, resigned after being investigated for corruption as Beijing wrestled this year with the country's high level of graft and financial fraud. Lai was one in a slew of top Chinese executives and businessmen that regulators investigated as they focused on risks in the financial sector, lending practices, and corporate debt.

The investigation has taken a toll on the "bad bank." Under scrutiny, Huarong acted cautiously and was soon running out of liquidity, as its operations slowed down. In July, the company attempted to call back loans and get an early exit out of several deals, as well as began to divest equity stakes and cut its employees' salaries, as reported by Reuters.

Under Huarong's new chairman, Zhanfeng Wang, the company said it planned to refocus on its core bad-debt business and away from acquisitions, which it has been practicing for years. Among its divestments, Huarong had sold its recently acquired 36 percent stake in a unit of CEFC China Energy, one of the country's largest private financial services conglomerates.

For the first six months, Huarong posted a 95 percent decline in income at $99.7 million. Its annualized return on average equity fell to just above 1 percent during the period from 23 percent a year ago. Its annualized return on average assets decreased to 0.12 percent from 2.1 percent, the company reported.

Following the disappointing financial results in the first half, the company pulled its IPO plans for mainland China last month. In a post on Hong Kong Exchanges and Clearing Ltd.'s website, Huarong said, "In light of the reasons that the company recorded a prominent decrease in the interim results ... while the former chairman of the company is currently under disciplinary review and supervision investigations by relevant authorities... the company decided to withdraw the application for the A-share offering."

Despite the "prominent" drop in profit, the company's management said it remained optimistic about its future. Huarong's big shareholders, including Warburg Pincus LLC, China Life Insurance Co., and Sinochem Group, kept their stakes in the company, according to a September statement by acting President Li Xin. The company also said its business went back to normal and its figures have been on the recovery from mid-year. As to the shelving of its IPO plans in the mainland, Huarong said it "will not give rise to any material adverse impact on the financial operations of the company."

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Since April, Huarong's shares in Hong Kong have shed more than half their value, closing at HK$1.36 Monday.

Huarong's valuation was at $8 billion in September, according to a report by Bloomberg, down from $15 billion in 2015 when the asset manager completed its Hong Kong IPO.

(Reuters contributed to this article)

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