The major mainland aluminium producer had listed with much funfare in Hong Kong last April and was among the hottest IPOs in 2009. But it has been the subject of much scrutiny since September, when allegations arose that its IPO prospectus contained falsified information.

 

Vowing transparency, Zhongwang hired accounting heavyweight Ernst & Young to conduct an independent investigation to prove that the sales transaction data and tax documentation disclosed in its prospectus are accurate. On January 5, Zhongwang filed a two-page announcement with the Hong Kong Stock Exchanges and Clearing that, in effect, confirms its version of events.

 

“Ernst & Young has submitted the independent review report to the Audit Committee [of Zhongwang],” said the announcement. “The Audit Committee has reviewed the independent review report and the Audit Committee is in the opinion and confirms that (i) there were no any deficiencies in the Group’s sales transactions with the major 10 customers during the period from 1 January 2008 to 30 June 2009 in any material respect; and (ii) there were no any deficiencies in annual corporate income tax filing documentation and the corporate income tax payment records for the financial year ended 31 December 2008 in any material respect.”

 

But if Zhongwang expected these bald statements to end the controversy, it was wrong. Two days after the January 5 announcement, trading in the company’s shares was suddenly suspended. After trading resumed on February 8, the stock price plunged nearly 30% to HK$5.87. Today, it continues to languish at the HK$6 level, down 45% from its high of HK$10.88 last July and 12% lower than its IPO price of HK$7 per share.

An examination of the events and Zhongwang’s responses to them suggests that the company had done some things right – but failed to handled other issues with finesse and transparency. Unfortunately, in this post-crisis environment, investors and the media tend to focus on the negative and the stock gets punished accordingly.

 

To his credit, Zhongwang’s finance director, Vincent Cheung Lap-kei, had been front and centre when the controversy initially broke. He staunchly declared, for example, that “Zhongwang confirms the accuracy of its operational and financial information.”

 

Cheung’s fighting words were backed by an impressive series of initiatives. After strongly refuting the article by mainland newspaper Economic Observer that started it all, Zhongwang won a retraction and an apology from the daily. The Observer admitted that its story was written “without first verifying the relevant facts with the Company, without first evaluating all the relevant materials and based on interviews with persons who have limited knowledge of the facts.”

 

Then in a video press conference in September, representatives from four major Zhongwang customers confirmed the accuracy of the transactions and their company’s business relationship with Zhongwang as disclosed in the IPO prospectus. The company later said that its audit committee, composed of independent non-executive directors Wong Chun Wa, Wen Xianjun and Shi Ketong, will oversee an independent review of the information set forth in the prospectus.

 

The media reported that Ernst & Young had been hired to undertake the independent review. In a November conference call, Zhongwang executives indicated that the review would take five weeks, setting up expectations that the results would be announced by December 15.

 

Zhongwang’s actions bought it some time. Its stock price stabilised as investors appeared willing to give it the benefit of the doubt while awaiting the results of the independent review.