The dangers of investing in Chinese companies listed on the ASX was brought home to shareholders in Sino Australia Oil and Gas Ltd (ASX: SAO) today, after the company was placed into administration.
Sino Australia had its accounts frozen after two directors blocked an attempt by the company's chairman Shao Tianpeng to transfer $7.5 million of the company's funds to bank accounts in China of which they had no knowledge of. The Australian Securities and Investments Commission (ASIC) then suspended the company's accounts in March 2014.
Perhaps unsurprisingly, the two directors were sacked by Sino Australia in March last year.
The regulator was also investigating (PDF) the company's reported net profit for the 2013 financial year – which was around 40% lower than forecast in the prospectus, while half of the profits were reported to be from currency gains. Earlier this year, Sino Australia reported a 73% fall in net profit to just $2.2 million for the 2014 financial year. It remains to be seen whether the company's auditor, Grant Thornton, will play any part in the investigation.
ASIC was also investigating suspected contraventions of the Corporations Act relating to trading in its shares – according to the company and court documents filed by ASIC.
In November last year, ASIC filed a Statement of Claim in the Federal Court alleging that the prospectus issued by the company contained false statements, and was seeking to have Tianpeng Shao disqualified from managing a corporation, and civil penalties imposed against the company.
last year Sino Australia says it had been unable to operate properly because the funds to be transferred to China were payments for three pieces of equipment the company required. Now Sino Australia says it had no option but to call in the administrators.
What is surprising is that chairman Tianpeng Shao held 62% of the shares in the company – worth $64 million at the shares last traded price of 47.5 cents (on paper at least). He resigned from the company in October 2014.
Sino Australia's business appears questionable too – it says it had developed proprietary technology to enhance the production of existing oil fields, and improve oil recoveries compared to traditional techniques from both producing and 'dead' wells.
The result clearly shows the danger of investing in Chinese companies listed on the ASX of which there are several – including U & D Coal Ltd (ASX: UND), Sunbridge Group Ltd (ASX: SBB), Sino Gas & Energy Holdings Limited (ASX: SEH), Victor Group Holdings Ltd (ASX: VIG) and Shenhua International Ltd (ASX: SHU).
As we've warned several times before, (here and here), Australian investors may be putting misplaced confidence in the financial records of these companies. Auditors of Chinese companies have been hoodwinked in the past so aren't a guarantee of 'financial soundness'.
Buyer beware.
