Shares suspended in China Metal Recycling after fraud allegation made
The company that claims to be the largest metal recycling company in China has suspended trading of its shares on the Hong Kong stock exchange.
China Metal Recycling (CMR) says it is the largest mainland scrap metal recycling company in China based on its 2008 revenue.
But a report from American short-seller Glaucus Research Group has branded this a “lie”.
As a result, CMR has suspended its shares on the Hong Kong stock exchange while it prepares a response to the allegation.
In the report, Glaucus said: “CMR purports to be the largest scrap metal recycling company in China. We believe that this is a lie.
“Publically accessible import data from the Chinese Government suggests that CMR is a blatant fraud that has deceived the market about the size of its business.”
The report notes that the company has never been legally allowed to import more than 87,500 tonnes of non-ferrous scrap metal in a year, yet the company would have to be importing an average of around 120,000 tonnes of non-ferrous scrap per month in 2011-12.
It also says that CMR is not even in the top ten of monthly scrap copper importers, and that its competitor Chiho-Tiande is the top importer each month despite supposedly being one fifth the size of CMR by sales.
China Metal Recycling Holdings Ltd. (“CMR” or the “Company”) purports to be the largest scrap
metal recycling company in China. We believe that this is a lie. Publicly accessible import data
from the Chinese government suggests that CMR is a blatant fraud that has deceived the market
about the size of its business.
1. CMR is Nowhere Near its Reported Size. Multiple independent sources show that CMR
could not be sourcing anywhere close to the volume of scrap necessary to produce its reported
volume of processed metals.
a. MEP Import Data Indicates Fraud. Publicly available data from the Chinese Ministry
of Environmental Protection indicates that CMR has never been legally allowed to import
more than 87,500 tons of non-ferrous scrap metal in any year, even though the
Company would have to be importing an average of ~120,000 tons of non-ferrous
scrap per month in 2011-2012 (~ 1,440,000 tons per year) to produce its reported
b. Customs Data for Copper Imports Indicates Fraud. Similarly, in order to produce
CMR’s reported volume of copper, CMR would need to import ~113,000 tons of scrap
copper per month, which would make it by far the largest scrap copper importer in China.
Yet 2011 and 2012 customs data shows that CMR is not even in the top 10 of monthly
scrap copper importers, and that Chiho-Tiande (HK: 0976), a competitor supposedly 1/5th
the size of CMR (measured by sales), is listed as the top importer each month.
c. All the Scrap in China. In order to produce CMR’s reported volume of processed
copper, CMR would have to account for 34% of all imported scrap copper and over 50%
of the domestic scrap copper market in 2012. Such a market share is not plausible.
2. Sales to Top Customer Highly Suspicious. For the Company’s financials to be believed,
CMR would have to account for 84% of the non-ferrous metals supplied to its largest
customer (a Guangzhou state owned enterprise) in 2011, a level of supplier concentration we
find highly improbable.
3. Fictitious Financials. Many of the Company’s key financial and operational metrics deviate
so significantly from other scrap metal recyclers that its reported performance defies
a. Suspiciously Amazing Growth Rate. CMR’s revenue and EBITDA growth from 2006-
2011 was more than twice its nearest competitor, even though the Company’s spent less
on capital expenditures than its peers and its capacity utilization was strikingly low.
INDUSTRY: Waste Management
COMPANY: CHINA METAL RECYCLING HOLDINGS LTD |
INDUSTRY: Scrap Metal Recycling
b. Revenue per Employee Figures Not Credible. CMR claims to generate $US 11 million
of revenue per employee, a worker productivity rate that is 10x higher than all of its
major industry peers and 6x higher than the revenue per employee generated by Apple (~
$US 2 million per employee), generally regarded as one of the global leaders in yield per
employee. This is simply not believable.
c. Inexplicable Inventory Turnover. CMR claims to turn inventory five to six times as
fast as Chiho-Tiande, its closest domestic competitor.
d. Madoffian Return on Capital. The consistency of CMR’s return on capital through the
2008 financial crisis bears more resemblance to Bernie Madoff's fabricated returns than
the returns generated by a highly cyclical scrap metal business during a commodities
4. Woe be the CFO. Only six months after the Company’s initial public offering, CMR’s CFO
abruptly resigned on the grounds that the board of directors failed to address concerns over
potential improprieties that he brought to the attention of the audit committee and denied him
access to CMR’s financial records.
5. Chairman Cashing Out. On January 25, 2013, CMR announced that its Chairman, CEO and
founder, Chun Chi Wai, entered into an agreement with a state-owned enterprise to sell 56%
of his shares in the Company. When the man who knows the most about CMR cashes out of
the majority of his shares, investors would be wise to heed his example. We believe that there
are two possible explanations for this transaction: either the purchaser is another victim of
CMR’s deception, or officials at the state-owned enterprise are corrupt and thus complicit in
6. Valuation. As of June 2012, CMR had HKD 5.7 billion of bank debt outstanding, the
holders of which would take priority over shareholders. Because we believe that the
Company has significantly overstated its sales, we doubt the authenticity of its reported
receivables and inventory. The book value of the Company’s property, plant and equipment
is only HKD 460 million, so even after senior secured bank creditors seize CMR’s fixed
assets, such creditors would still be owed over HKD 5 billion! After senior secured debt
holders, local Chinese unsecured creditors with priority over Hong Kong shareholders are
owed roughly HKD 10 billion. The Company’s heavily levered balance sheet and the scale
of its deception suggest that shareholders will be left with nothing. We therefore put a price