A follow up on China Aviation Oil. Yes. Neither DD nor AA are needed. :-)
quote.bloomberg.com
China Aviation Oil Losses Serve as `Reminder' of Risks in China
Dec. 9 (Bloomberg) -- Chief Executive Officer Chen Jiulin used what he called ``Chinese wisdom'' to triple China Aviation Oil (Singapore) Corp.'s market value in three years.
The success story is over. Singapore police are investigating the Singapore-traded fuel supplier, which said on Nov. 30 it sought court protection from creditors after losing $550 million in speculative oil trades. The board of directors suspended Chen, 43, that day, and he was arrested yesterday.
China Aviation Oil, named Singapore's most transparent company by the island's Securities Investors Association in 2002, is among hundreds of Chinese state companies that have prospered in the past decade by selling shares in Hong Kong, Singapore and New York. Temasek Holdings Pte, Singapore's government investment company, owns almost 2 percent of China Aviation Oil.
The company's decline underscores the risks faced by investors in mainland Chinese companies, says Michael Coleman, managing director of Singapore-based Aisling Analytics Pte, which manages investments for hedge funds. Aisling holds what Coleman says is a ``small'' number of China Aviation Oil shares.
``It does raise some serious questions about Chinese companies,'' Coleman says. ``Can they govern themselves effectively? So far, all the evidence suggests that they can't.''
China Aviation Oil, which supplies almost all of China's jet- fuel imports, disclosed its losses a month after its state-owned parent sold a 15 percent stake in the company to institutional investors in a sale arranged by Deutsche Bank AG.
Under Investigation
Singapore's Commercial Affairs Department, the police white- collar crime unit, said on Dec. 3 it began investigating the losses. China Aviation Oil is also under investigation by the Monetary Authority of Singapore, the island's central bank; and Singapore Exchange Ltd., which operates the stock exchange.
Chen flew to Beijing from Singapore on Nov. 30, the day he was suspended, according to company statements. He was arrested on his return to Singapore yesterday and released on bail after questioning, China Aviation Oil said in a statement.
``I come to explain,'' Chen said as he left Singapore's main police station yesterday. ``I have an obligation and a responsibility to do so.''
In a Nov. 29 affidavit to Singapore's High Court, Chen said he knew about growing trading losses from oil-price gains before the company's Beijing-based parent, China Aviation Oil Holding Co., raised S$196 million ($119.5 million) by selling a 15 percent stake in the company. The sale's purpose was to help meet margin calls, or funding requirements, on oil trades, he said.
`Bid to Raise Capital'
``In a bid to raise capital for the margin calls, CAOHC placed out 15 percent of its shares in the company,'' Chen said in the affidavit, filed as part of the company's High Court application seeking protection from creditors. The filing was announced the following day.
The company had trades totaling 52 million barrels of oil by October, according to Chen's affidavit. New York oil futures closed at a record $55.17 a barrel on Oct. 22, a day after Deutsche Bank said it had completed the stake sale.
China Aviation Oil didn't disclose the reason for the sale to shareholders. John Casey, a company spokesman, said on Oct. 21 that the parent company ``had an investment they are making and they need to raise the cash.'' He didn't give details. A prospectus wasn't issued because the Singapore Exchange doesn't require them for placements of existing shares.
China Aviation Oil said on Oct. 28 that the sale would make the company more transparent.
`Corporate Best Practices'
``The greater presence of institutional investors in our roster will serve to ensure corporate best practices on our part, and so should be considered a net positive by all investors,'' the company said in an Oct. 28 statement to the Singapore Exchange.
Deutsche Bank says it questioned China Aviation Oil about its finances before the sale and wasn't told about the trading losses.
``The answers provided gave us confidence to proceed with the placement,'' Mike West, a Deutsche Bank spokesman in Hong Kong, said on Dec. 6. Asian institutional investors bought three- quarters of the stock and European investors purchased the rest, according to Frankfurt-based Deutsche Bank.
Before their suspension, China Aviation Oil's shares more than tripled from their December 2001 trading debut as the company announced plans to refine, store and trade oil in Singapore, the Middle East and Europe. The company's market value rose to S$933.8 million from S$322.6 million.
Sell-Off Began
The sell-off began on Nov. 25, a day after China Aviation Oil's parent blocked its planned purchase of a stake in oil refiner Singapore Petroleum Co. The shares slid 23 percent in two days to 96.5 Singapore cents before the company halted trading Nov. 29.
China Aviation Oil stated its losses the next day. It said in a statement that it was forced to close speculative trades when it couldn't meet funding requirements needed to back the contracts after oil prices surged to a record in October.
The statement outlined a rescue plan under which China Aviation Oil's Beijing-based parent company and Temasek would invest U.S.$50 million each to keep the company afloat.
China Aviation Oil's losses ``highlight the risk surrounding many China-based and China-related companies as a result of limited transparency,'' New York-based Standard & Poor's said in a Dec. 3 statement. S&P doesn't rate the company's debt.
Temasek will probably invest in China Aviation Oil as Singapore seeks to strengthen ties with China, says Dariusz Kowalczyk, senior investment strategist at CFC Securities Ltd. in Hong Kong.
`Worth It'
``Temasek is telling China, `We want to help save a company that is important to mainland China,''' Kowalczyk says. ``The actual investment is very small. It will be worth it. The Chinese government will remember.''
The Singaporean investment company, which spent millions of dollars buying China Aviation Oil shares, could lose more if it invests the $50 million and the company goes under.
``That's a commercial decision Temasek has to make: whether it's worth taking that gamble,'' says Manu Bhaskaran, head of economic research in Singapore for Centennial Group Inc., a Washington-based advisory group. ``It should not be a political decision.''
Temasek bought shares when China Aviation Oil's parent company sold stock to institutional investors in October, according to Temasek spokeswoman Eva Ho. The company hasn't decided whether to increase its investment, she said on Dec. 6.
``Temasek has expressed an indicative interest in exploring participation in the company's restructuring efforts,'' China Aviation Oil's statement said.
Bailout Plan
Under the bailout plan, Temasek and China Aviation Oil Holding would together own a majority equity stake in the company, according to the statement. The Chinese parent currently holds 60 percent of China Aviation Oil's shares, according to an Oct. 22 statement to the Singapore Exchange.
Temasek has recently increased its investments in Chinese companies. Last month, it won approval from China's government to buy a 4.55 percent stake in China Minsheng Banking Corp., the nation's first privately owned bank, from state-owned China National Coal Group Corp., the Chinese lender said in a statement.
China's importance to Singapore's economy is growing. China was the island's fourth-biggest trading partner last year after Malaysia, the U.S. and Japan, according to International Enterprise Singapore, a government agency. Trade between the nations grew 31 percent to S$35.9 billion last year.
`Chinese Wisdom'
Chen, an 11-year veteran of China Aviation Oil, was named president of Singapore's China Enterprise Association in August. He became a founding member of New Asian Leaders, a group selected by the organizers of the Geneva-based World Economic Forum, last year.
China Aviation Oil -- whose motto is ``Chinese Wisdom, International Expertise,'' according to its Web site -- isn't the only Chinese company that has disappointed investors.
Wah Sang Gas Holdings Ltd., whose shareholders include the investment arm of China's Tianjin city, was suspended from trading by Hong Kong's Securities and Futures Commission on April 6. The Hong Kong-listed company said in a May 24 statement that the regulator was investigating the accuracy of profit reports and ``suspicious fund flows'' involving units in China.
China's State Administration of Foreign Exchange later fined the units 6.74 million yuan ($814,354) for violating currency regulations, the company said on Oct. 14. The stock, which slid about 40 percent from December to April to 64 Hong Kong cents, hasn't resumed trading. Wah Sang spokeswoman Chickita Wong didn't return phone calls or reply to an e-mail seeking comment.
`Unorthodox Loans'
Shanghai Land Holdings Ltd. suspended its shares from Hong Kong trading in June 2003, pending clarification of ``certain press articles'' that said Chairman Zhou Zhengyi had been arrested by Chinese authorities, according to a company statement to the stock exchange. The shares, which are still suspended, fell 40 percent in their last month of trading to 34.5 Hong Kong cents.
A week later, the company placed itself in court receivership, citing 650 million yuan in ``unorthodox loans'' made by two of its hotel units. Joey Cheung, a Hong Kong-based spokeswoman for Ernst & Young, Shanghai Land's court-appointed receiver, declined to comment.
U.S. shareholders in state-controlled China Life Insurance Co., which raised $3.5 billion in the world's biggest share sale of 2003, filed a class-action suit against the company in a New York federal court in March, alleging that the Beijing-based insurer had violated federal securities laws.
China Life Complaint
Shareholders in the complaint say that China's biggest insurer failed to disclose a financial fraud associated with its parent company, China Life Insurance (Group) Co., before its initial public offering.
The parent company ``engaged in criminal acts involving illegal agent services, illegal premium payments, embezzlement and depositing monies in illegal bank accounts,'' according to a complaint filed in the Southern District of New York on March 16.
Li Yinghui, a China Life investor-relations officer in Beijing, said the company's lawyers are in talks with legal counsel for the shareholders.
China-related companies' shares have fallen in the wake of China Aviation Oil's losses. Shares of Cosco Corp. (Singapore) Ltd., a Singapore-listed unit of China's biggest shipping company, have slid 16 percent since Nov. 30.
Hong Kong's Hang Seng China Enterprises Index of 38 mainland companies has fallen 3.8 percent since Nov. 30, compared with a 0.1 percent drop for the Hang Seng Hong Kong Large Cap Index of the city's 16 biggest companies by market value. The China Enterprises Index is down 4.8 percent this year.
`A Timely Reminder'
``Investors have always been concerned about lax corporate governance, and China Aviation Oil is a timely reminder that the problems are quite serious,'' says David Webb, a Hong Kong-based shareholder-rights activist. ``If you want to take these risks, pay less for the stocks.''
Liu Mingkang, chairman of China's banking regulator, says the nation is working to improve corporate governance standards.
``The government recognizes the need for corporate governance,'' Liu, 58, said in a speech at a Dec. 1-2 conference on corporate governance in Beijing, sponsored by London-based Euromoney Institutional Investor Plc. ``We have been trying to build a corporate governance philosophy concurrently with our efforts to create a market economy.''
Some of China's biggest companies have rewarded investors. Shares of Beijing-based PetroChina Co., the nation's biggest oil producer, have more than tripled since their Hong Kong trading debut in April 2000. PetroChina profit rose 48 percent last year.
Shares of China Mobile (Hong Kong) Ltd., the publicly traded unit of the world's largest mobile-phone operator by subscribers, have more than doubled since their October 1997 start of trading.
Wave of Speculation
China Aviation Oil began losing money after it joined a wave of commodities speculation as China's demand for metals and fuel caused global prices to soar in the past year. The number of open trades on oil futures rose more than 25 percent in the first eight months of 2004 from a year earlier, according to the Basel, Switzerland-based Bank for International Settlements.
Company rules aimed at limiting risks didn't prevent the losses. According to China Aviation Oil's 2001 initial share-sale prospectus, traders were required to halt trading in the event that losses reached $500,000 -- unless they had Chen's approval to continue.
``As chief executive of a company that size, with 10 traders, it wouldn't have done anything without his acknowledgment,'' says Eswaran Ramasamy, director of Asian oil- market reporting at Platts in Singapore. Platts, a unit of New York-based McGraw-Hill Cos., blocked China Aviation Oil from trading fuels on its system on Dec. 1, according to Ramasamy.
`High Flyer'
Chen grew up in central China's Hubei province and didn't ride a bus until he attended university, according to an interview with him titled ``High Flyer'' that was published in the November issue of Singapore Tatler.
He graduated from Beijing University in 1987 with a Bachelor of Arts degree and received a law degree from the China University of Political Science and Law in 1996, according to China Aviation Oil's 2003 annual report. In 2001, he earned a master of business administration degree from the National University of Singapore.
Chen worked at Beijing-based Air China, the nation's biggest international airline, before joining China Aviation Oil's parent in Beijing as chief negotiator and project manager in 1993, according to the annual report. He took the company's helm in 1997 and helped increase annual profit to S$54.3 million in 2003 from S$13.5 million in 2000.
Due Diligence
``This is just the beginning,'' Chen said of his success in the Singapore Tatler article. ``Sometimes you are lucky, but I don't expect luck.''
Guan Anping, managing partner at Beijing law firm Anping & Partners, says overseas investors in Chinese companies can't count on luck to safeguard their interests.
``They need to be more careful in their due diligence,'' Guan says. ``The government hopes state-owned companies will follow international rules, but many want to use the double advantage of maximizing their profits through their government links while escaping government regulation.''
To contact the reporters on this story:
Yoolim Lee in Singapore at yoolim@bloomberg.net
Jasmine Yap in Hong Kong at jyap5@bloomberg.net
To contact the editor responsible for this story:
Adrian Kennedy at at adkennedy@bloomberg.net
Last Updated: December 8, 2004 13:38 EST |
