Guangdong Kelon Electrical Holdings Co, China's biggest refrigerator maker, said an investigation found that former executives had inflated sales and embezzled at least 592 million yuan (US$73 million). The company's shares fell after the news.

 

Kelon may have to restate earnings after auditor KPMG International found sales were inflated by transactions with affiliates controlled by former Chairman Gu Chujun, the company said in a statement to the Shenzhen Stock Exchange yesterday. Hisense Group, China's sixth-biggest electronics company, bought control of Kelon in September after Gu was arrested and fired.

 

The appliance maker may need to obtain a bank loan or sell account receivables to continue "normal" operations, according to the statement. Kelon said in October that it expects to return to profit by the end of this year after gaining a pledge of funding from Hisense and winning new orders.

 

"It won't be easy for the company to revive before the final results come out," said Gu Qing, an analyst at Haitong Securities Co. "The embezzlement has hurt the company's cash flow and image. The company has yet to explain how Gu managed to embezzle such a large sum of money."

 

Kelon's local-currency shares fell 4.3 percent to 2.24 yuan (28 US cents) at the trading break in Shenzhen following the news, on course for its biggest one-day decline in two months. The stock has slumped 45 percent in the past year. The company's Hong Kong-traded shares have been suspended from trading since June.

 

Kelon, based in Foshan in southern China's Guangdong Province, said last month it appointed KPMG to examine its cash flows and removed three executive directors, including Gu.

 

The investigation found "evidence of abnormal sales" recorded by Kelon for dealings with companies affiliated with Gu's Guangdong Greencool Enterprises Co. Greencool in September sold its 26.4 percent stake to Hisense for 900 million yuan (US$111 million).

 

Greencool and 28 affiliated entities, including Shanghai Greencool Environmental Engineering Co and Jiangxi Greencool Industrial Development Co, embezzled at least 592 million yuan (US$73.09 million) of cash from Kelon, the statement said.

 

Kelon, saddled by lawsuits with combined claims of 594 million yuan (US$73.33 million) with banks and customers, said in October that it expected to return to profit after winning a US$75 million order with an unidentified international home appliance company.

 

Hisense agreed to provide as much as 600 million yuan (US$74.07 million) of funding to help the company stay in business, Kelon said in September. The company was forced to halt some production between May and August as suppliers stopped shipments after the investigations into Gu and other executives were disclosed.

 

KPMG, which examined material cash flows for Kelon and its 29 subsidiaries between October 1, 2001, and July 31, 2005, found 4.07 billion yuan (US$500 million) of cash outflows and 3.48 billion yuan (US$430 million) of cash inflows during the period, according to yesterday's statement.

 

Gu, who is in police custody, was arrested on September 2 on suspicion of "economic crimes," a term that in China refers to a range of violations including fraud and embezzlement.

 

Six other executives were taken into custody, while Yan Yousong and Zhang Hong were removed as directors. Kelon said in October that the China Securities Regulatory Commission might punish some of Kelon's former board members and existing senior managers.

 

Kelon reported a net loss of 44.7 million yuan (US$5.52 million) in 2004, after posting profit of 84.2 million yuan (US$10.4 million) in 2002 and 197.3 million yuan (US$24.36 million) in 2003. Its managers are alleged to have inflated profits since 2002 and violated securities laws, the China Securities Journal reported last year.

 

(China Daily January 24, 2006)