Financial Kowtow Hanfeng Style

Hanfeng has run into a severe crisis in China, as its largest customer has refused to buy its fertilizer products unless the Toronto-based company goes private. The customer, a state-owned entity called Beidahuang Agriculture Company Ltd., is also interested in buying a stake in Hanfeng — but only after the firm is acquired by CEO Xinduo Yu. ...

Hanfeng used to sell its fertilizer products to a wide variety of Asian customers. But in the past couple of years, it has focused almost exclusively on Beidahuang, which accounted for more than 70% of the company’s sales in 2012.

The downside of this partnership became apparent late last year, when Beidahuang wasn’t buying. Sales in the quarter ended Dec. 31 were just $8.5-million, compared to $45.8-million in the same quarter a year ago. Hanfeng also recorded a massive $118.5-million writedown on its flagship Chinese operation. That writedown was worth more than the company’s entire market value today, which is roughly $106-million.

http://business.financialpost.com/2013/03/15/shareholders-of-chinese-fertilizer-firm-hanfeng-approve-ceos-takeover/

This is yet another example of the dangers of investing in Chinese companies listed on the TSX.  Corruption, political interference - these are staples of the business scene in China.  Small fry like Hanfeng are eaten for breakfast, although conspiracy theororists could have a potential field day in this instance.  As stated previously, I will never again invest in companies of this nature.  Check out the website of Hanfeng Evergreen - the bland corporate speak is akin to Hanfeng's competing product - organic fertilizer. 

http://www.hanfengevergreen.com/home.html

Meanwhile, the TMX and TSX continue to solicit listings of Chinese companies:

http://www.tmx.com/china/index_en.html

I took a brief look at the listings and noted that Cathay Forest Products was included.  Too bad that the following item was not annotated:

Since the board reconstitution, the new board has been working to properly understand the existing assets and liabilities of the Company and to develop and implement, to the extent possible, an orderly disposition of those assets in a manner that generates maximum possible value.  The new board's efforts in that regard have been challenged by a number of factors, including the lack of liquidity within the Company and its subsidiaries, the location of the Company's principal indirect assets in the People's Republic of China (the "PRC") and the Russian Federation, the ownership of certain of those indirect assets through joint-venture or other arrangements in which third parties have an interest, the staff turn-over that had previously occurred at the Company and its subsidiaries, the difficulties in accessing available corporate and other records, and the continuing need to manage various legacy issues, claims and liabilities arising from the business and affairs of the Company prior to the board reconstitution.

http://www.newswire.ca/en/story/1101295/cathay-forest-products-corp-update

These are not isolated incidents.  Chinese officialdom is getting concerned and the heavy hand of the state machinery is starting to focus on the issue:

The failures have damaged the country’s corporate reputation and prevented many Chinese companies from raising money from North American investors, at a time when China’s corporate and political leadership is trying to play a bigger role in global business and finance. This week, China’s official Xinhua newswire, a mouthpiece for the Communist Party government, praised a group of Chinese businessmen who have publicly attacked short-sellers like those who employed Mr. Huang. Xinhua connected the fight to China’s broader effort to be treated as an ordinary player on the global capital markets.

“Due to differences in political systems, economic structures and culture, foreign investors are prone to view Chinese companies with suspicion and prejudice,” Xinhua wrote. The newswire linked such “suspicions” to foreign governments blocking takeover bids by champion Chinese firms such as China National Offshore Oil Corp. (whose $15.1-billion (U.S.) bid for Calgary-based Nexen Inc. is currently being reviewed by Ottawa) and telecommunications giant Huawei Technologies Co. Ltd.

http://www.theglobeandmail.com/report-on-business/international-business/asian-pacific-business/in-china-silvercorp-critic-caught-in-campaign-by-police/article4528671/

My suspicion is that large multinationals have some chance of surviving in this environment due to their size and ability to cultivate political connections.  And if things do go south, market diversification will help to ease the pain.

China has a rapidly developing economy and it has made amazing strides in raising a large proportion of its population out of poverty within a very short period of time.  The widespread work ethic and respect for eduction will position the country well for the future.  

Financial malfeasance is not restricted to China.  Some of the biggest con jobs have occurred close to home. It is always useful to remember that financial shenanigans in the United States of the part of  the Robber Barrons, and more lately, the Wolves of Wall Street, are a feature of investing life.  It literally pays to be sceptical and to check out the credentials of company officers before succumbing to their blandishments.