China Metal Recycling Holdings Limited: Scrap King Gets Scrapped
China Metal Recycling Holdings Ltd ("CMR" or "the Company") was said to be the largest scrap metal recycling company in mainland China. It was listed on the Hong Kong Stock Exchange in June 2009. For a few years after its initial listing, the Company reported extremely high revenue and profit growth. Many investment houses assigned its stock "buy" or "strong buy" recommendations. This optimistic situation lasted until January 2013, when California-based Glaucus Research Group issued a report pointing out that, in comparison with other publically available industry data, CMR's reported sales figures were unlikely to be true. This rang the regulatory alarm bell. The Securities and Futures Commission of Hong Kong ("SFC") conducted an investigation and found reporting fraud. On July 29, 2013, the SFC obtained court orders appointing provisional liquidators to take over the Company. CMR was suspended from trading on main board of the Hong Kong Stock Exchange. Several of the Company's key directors and officers were arrested in the next couple of weeks. The information provided in the Company's annual reports complied with Hong Kong listing requirements and financial reporting standards. It apparently had sound corporate governance structures. For three and a half consecutive years, its external auditor, a leading international accounting firm, had given its financial statements "true and fair" marks. With all these seeming positives, investors were easily misled. How can investors uncover such camouflaged financial fraud? What are the key risk areas one should focus on when analyzing a company? How can a company's financials be double-checked using publically available information?