The time is right to restructure Guangdong Kelon Electrical Holdings Co, one of China's leading electronic appliances producers, if the problem-ridden firm wants to survive, analysts say.

"If Gu Chujun, the president of Kelon's largest shareholder Greencool, remains in charge of Kelon, it is unlikely that the company will get out of trouble," an analyst who declined to be named told China Daily. "And Greencool itself may also be in trouble."

Kelon shares dropped by 10.16 percent after a court froze its 59.28 million shares in Huayi Compressor Co and 17.1 million yuan (US$2 million) in deposits, according to Kelon.

The Jiaxing Intermediate People's Court in East China ordered the freeze after Huayi took Kelon to court due to a loan-guarantee dispute. Having 22.73 percent of a stake in Huayi makes Kelon the second largest shareholder of the company.

Kelon's stock lost 0.19 yuan (2.2 US cents) an fell to 1.68 yuan (20 US cents) on the Shenzhen bourse after a two-day suspension. The firm's Hong Kong-traded shares have not been traded since June 16. But Huayi's stock jumped 2.54 percent, reaching 2.02 yuan (24 US cents) yesterday.

According to a report from China Business Times, Kelon has slowed down production to virtually nothing, which is unusual at a time when air-conditioners sell extremely well.

Due to huge loss of over 60 million yuan (US$7.23 million) in the fourth quarter last year, the China Securities Regulatory Commission (CSRC) launched an investigation into Kelon in April.

Kelon reported profits of 200 million yuan (US$24 million) in the first three quarters of last year, thus the sudden loss in the last quarter drew much attention. A number of investors believed that Gu Chujun embezzled Kelon's capital to acquire Meiling Electronics and Yaxing Truck.

Yan Yiming, a Shanghai-based shareholders' rights activist and a lawyer, is seeking to become an independent director at Kelon, aiming to investigate the appliance maker's finances.

It is reported that Yan is discussing with a Hong Kong institutional investor on vote collection.

"Our target is to collect shares exceeding 26.43 percent, a number held by the largest shareholder Greencool," Yan Yiming was quoted by China Business News as saying. "We are confident that we can get 10 percent of shares now, thus we can convene a temporary shareholders' meeting."

Rumours are swirling that 700 million yuan (US$43.4 million) to 800 million yuan (US$96.4 million) has been embezzled in Kelon and it suffered a production suspension in May due to capital shortages.

"All these rumours will be clarified after a detailed investigation," said Yan.

Three previous independent directors quit after receiving no response to inquiries over Kelon's affiliated transactions, Kelon said in a stock exchange statement on July 8. And its auditor, Deloitte Touche Tohmatsu, also left after questioning the company's record keeping. What makes the situation even worse is that Kelon may report a "substantial" first-half loss because sales dropped by more than half in May.

How to save this problem-ridden list company? Restructuring is the best choice, and now is the time, according to experts.

A manager of Kelon's marketing department said that restructuring is conducive to the development of the company. "Most of the employees in Kelon share this viewpoint, but we haven't receive any notice to sell Kelon yet," he was quoted by the Economic Observer as saying. "A famous domestic TV producer is most likely to take over Kelon according to the on-going negotiation."

Some electric appliance producers, such as Electrolux, TCL and Midea, have shown an interest in buying Kelon, but Kelon has no plan to sell yet, an insider said.

"Kelon itself is a good company, and it will be an ideal shell after restructuring," an analyst with Huaxia Securities told China Daily.

For domestic investors, Kelon's brand awareness, its strong research and development (R&D) capacity and market shares are quite appealing. While for foreign investors, they are more interested in Kelon's production capacity, quality control system and marketing.

(China Daily July 20, 2005)