Switzerland’s Engelberg has been a resort town for nearly 170 years. As its English name “Angel Mountain” suggests, the spot is pristine and picturesque, exuding an alpine charm. It might not, however, seem the best location for a scientific research and development centre. But a Shenzhen-listed laser equipment maker established one there eight years ago. More surprisingly, the actual nature of its Engelberg investment went unremarked until recently, when the company was embroiled in a scandal concerning the country’s leading auditing firm.
In a letter dated July 17, the Shenzhen bourse asked Han’s Laser Technology a series of questions about financial irregularities. Top of the list was the construction budget of its “R&D centre” in Engelberg, which soared 21 times to Rmb1.05 billion ($150 million) between 2011 and 2018 – in addition to almost yearly capital injections into the relevant unit totalling Rmb160 million over the same period. In spite of these outlays only 64% of the planned construction was complete.
Han’s Laser explained that its R&D project involved refurbishing an existing hotel into a multi-purpose complex that could serve as a venue for conferences, meetings and staff training. It blamed the lengthy construction process and budget overrun on unforeseen difficulties – which included delays in the local government issuing a building permit, and a previously undisclosed plan to acquire an adjacent property so as to enlarge the so-called R&D facility.
A report by China Business Network, which dispatched its correspondent to the site in Engelberg, painted a different picture, however. “The centre’s actual registered address is just a 10-metre-square room in another building in Engelberg,” revealed the Shanghai-based media outlet. With a healthy dose of cynicism, it suggested that the chances of the hotel being repurposed into an actual R&D hub are “slim” because Switzerland’s rules over property use are strict. It also noted that not much was known about the project when its reporter made enquiries among the Swiss town’s officials.
What made things worse was Han’s Laser’s disgruntled boss, who got defensive about media enquiries into the unfinished project. “Who the heck are you? Who do you think you are to question me? It’s our capital, of course we have the right to deploy it with any investment decisions we make. How dare you trying to keep a tab on me?” Gao Yunfeng, Han’s Laser’s CEO, blasted a CCTV reporter in a taped interview.
Gao’s response did not go down well with the market, sending Han’s Laser’s share price to a two-year low. And his attempt to shield the investment from the public eye has left some investors querying his disregard for corporate stewardship. Having employed Ruihua Certified Public Accountants, the now infamous auditor fined by regulators for failing to detect financial fraud at listed companies (see WiC463), Gao’s European project looks like another odd case of auditing.
(Ruihua is now trying to overturn a Chinese court’s decision and is also suing the regulator for accusing it of failing to perform proper due diligence.)
Established in 1996, Han’s Laser has been a key supplier to the likes of Apple (the logo imprinted on the back of an iPhone requires its laser technology). It was among the first batch of stocks that went public on Shenzhen’s SME board in 2004, and has been locally regarded as a “white horse” stock, the equivalent of a blue chip elsewhere.
Having lodged steady profit growth over the past 14 years, it has also proven popular among foreign investors. So popular that following its official inclusion into the MSCI index in March, foreign holdings in the company crossed the 30% ceiling, meaning that trading in the stock – via the Hong Kong-Shenzhen stock connect channel – had to be suspended. But with the recent scandal and a dive in net profit for the first half – down 63% from a year earlier – that threshold is no longer under threat.
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