Zoomlion Heavy Industry Science & Technology Co. (1157), China’s second-biggest construction-equipment maker, denied allegations in a press article published yesterday that it had reported fictitious sales and falsified accounts.
All allegations in the report are “false, groundless and misleading,” the Changsha, China-based company said in a Hong Kong stock exchange filing yesterday, without identifying the publication it was refuting. “No accounting fraud has ever been committed,” the company said.
The response is Zoomlion’s second in a month to published allegations that it had falsified sales. The most recent report may be based on documents sent anonymously to media organizations, including Bloomberg News, that purport to respond to Zoomlion’s initial denial last month by showing the company has made false statements about revenue.
“Their revenue growth relative to all their peers and the economic activity in China doesn’t seem very credible,” Kevin Barnes, an analyst at Kerrisdale Capital Management LLC, a New York-based hedge fund with $150 million under management, said in an interview. “It’s also a difficult industry to audit, just because there’s so many pieces of machinery -- unless you have an external auditor who’s willing to go out and count them individually.”
Barnes declined to comment on whether Kerrisdale, which takes both long and short positions in stocks, has a position in Zoomlion’s shares.
Zoomlion jumped as much as 5.6 percent, the most since Dec. 5, in Shenzhen trading today. The stock changed hands up at 9.88 yuan, up 4.1 percent, as of 10:47 a.m. The Hong Kong-traded shares fell 1.2 percent to HK$10.24.
Last month, after the first round of allegations, Chairman Zhan Chunxin told reporters that the company achieved growth last year by gaining market share. Zhan spoke after Ming Pao Daily said on Jan. 8 that it had received an unsigned letter alleging Zoomlion’s sales are exaggerated.
The share price may have downward pressure in the short term because of the claims and that make the stock’s value even more “compelling,” Barclays Plc analysts led by Victoria Li said in a note to clients today. Zoomlion already had the lowest valuation among its peers, they said.
Copies of the letter were also sent to Zoomlion and the Hong Kong Securities and Futures Commission, according to the report. The shares plunged the most in eight months when trading resumed the following day.
In yesterday’s filing, Zoomlion said it books sales strictly in accordance with both its own revenue recognition policy and accounting rules, with auditing by Baker Tilly and KPMG. The company said it sometimes exchanges or replaces products for reasons including defects and technological change.
The National Business Daily, based in Shanghai, reported in an article published yesterday that it received documents that the sender said were from Zoomlion’s internal software system, including file materials of more than 100 pages.
The newspaper, citing its own reporting based on the information in the documents, said that there may have been false reporting in “first-line sales” in eastern China, including Shanghai and Jiangsu and Zhejiang provinces.
In one example, the newspaper reported that while the documents showed a customer in Zhejiang as having signed a contract for 15 pump trucks, he told the newspaper he had only bought two.
“Given the level of account/customer details mentioned, we believe it should be possible for Zoomlion to come back with a rebuttal,” said Yang Y. Song, a Hong Kong-based analyst at Credit Suisse Group AG, in a report yesterday referring to the National Business Daily article. “We look forward to clarifications from the company,” he said. Credit Suisse has an outperform or buy rating on the shares.
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