China firm with accounting error used funds to trade shares

One of China’s largest listed drug makers said related parties used the firm’s funds to trade its shares, a day after the securities regulator alleged financial data had been fabricated.

Kangmei Pharmaceutical Co. transferred 8.88 billion yuan ($1.3 billion) to connected entities to trade its own shares, it said in a filing that appeared on the Shanghai exchange on Saturday. The management of its capital and related-party transactions had "significant deficiencies," the firm said, and it sought a risk tag on its stock that will limit its daily moves within 5 percent instead of the normal 10 percent.

Kangmei probably fabricated bank deposits and other financial transactions, and is suspected of buying its own shares through related accounts, the China Securities Regulatory Commission said on Friday, following an initial probe. The company, which produces traditional Chinese medicines, revealed last month that it overstated cash holdings by $4.4 billion. One securities lawyer said that amount was unprecedented in China.

Investors stand in front of an electronic stock board at a securities brokerage in Shanghai.
Investors stand in front of an electronic stock board at a securities brokerage in Shanghai, China, on Wednesday, May 30, 2018. Foreign investors are about to get a bargain. At least, that's the optimistic slant after Chinese equities slumped for the longest stretch since 2013, taking valuations back to two-year lows right before they feature on MSCI Inc. indexes from June 1. Photographer: Qilai Shen/Bloomberg

Kangmei has asked Shanghai’s stock exchange to apply the "special treatment" tag to its shares. The label is intended to remind investors of the risks associated with trading the stock.

"For Kangmei, wearing a ’ST’ hat will alert more investors about its risks,” said Zhang Gang, strategist at Central China Securities Co. Now that the CSRC has found issues with its accounting, “the outlook for Kangmei is not optimistic at all. Bear in mind that the exchanges have stepped up its efforts to delist troubled companies with ST tags.”

Kangmei will be removed from the list of China Connect Securities from May 21, the Hong Kong stock exchange said in a statement on its website on Monday.

Kangmei shares were suspended from trading on Monday. They have lost 28% this year, among the worst performances on the MSCI China Index, after the company told investors that it was under investigation in December. Kangmei’s 5.33 percent bond due 2022 plunged 20 yuan to a record low of 32.3 yuan on Monday, according to prices compiled by Bloomberg.

The company has to pay coupon on a 1 billion yuan bond on June 21 and a 750 million yuan bond principal in September. It has a total of 20.65 billion yuan in outstanding bonds, according to Bloomberg-compiled data. Calls to investor relations team at Kangmei went unanswered on Monday.

The company will urge the related parties to solve the problems related to the fund transfers, it said in the filing.

— With assistance from Daniela Wei