Guangdong Kelon Electrical Holdings Ltd yesterday reported the biggest loss last year of China's listed firms, a result of a halt in production, a government probe and massive embezzlement by former executives.

 

Kelon, once the biggest home appliance manufacturer in China, reported that its net loss grew to 3.7 billion yuan (US$464 million) from 246 million yuan (US$30.75 million) a year earlier.

 

In a statement to the Shenzhen Stock Exchange, Kelon said its sales fell 11 percent to 7 billion yuan (US$875 million) from 7.9 billion yuan (US$987 million) last year.

 

The company's statement said that the huge loss was mainly a result of the halt in production after the China Securities Regulatory Commission (CSRC) launched a probe last April.

 

Kelon halted about half of its refrigerator production and 70 percent of air conditioner output between May and September, the hot season for sales.

 

Meanwhile, the probe squeezed Kelon's cash flow by undermining the confidence of financial institutions, suppliers and sales agents in the company.

 

The CSRC's five-month investigation revealed that Kelon's sales were exaggerated by 122.1 million yuan (US$15.25 million) between 2002 and 2004, adding 33 million yuan (US$ 4.1 million) to the company's net income, the company said in the statement.

 

As a result, the CSRC fined Kelon 600,000 yuan (US$75,000) last month, and penalties ranging from 50,000 yuan (US$6,250) to 300,000 yuan (US$37,500) were slapped on the company's top management.

 

According to the company's statement, if Kelon fails to release its report for the first quarter of 2006 by August 31, it will be de-listed the following day.

 

The company said on September 13 last year that it faced lawsuits from banks and customers with combined claims totalling 594 million yuan (US$74.3 million).

 

Despite the huge loss, Kelon's shares staged a strong comeback yesterday. Its A shares closed yesterday at 2.36 yuan (30 US cents), up 4.89 percent on the previous day, better than yesterday's overall performance of the Shenzhen Stock Exchange, where prices dropped 1.43 percent.

 

But Chen Yuanwang, an analyst at China CITIC Securities, explained that yesterday's good performance of Kelon shares was more than likely a result of short-term speculative behavior.

 

"The shares hike may be due to their low price," Chen told China Daily.

 

Kelon's yuan-denominated shares traded in Shenzhen dipped 0.9 percent on Friday to reach a low of 2.25 yuan (28 US cents). The company's Hong Kong-traded shares have been suspended since June 16 last year.

 

Despite its current problems, "Kelon's brand value and products mean that the company is still a good shell," Chen explained.

 

"If the ongoing restructuring of Hisense and Kelon proceeds smoothly, Kelon's prospects may become much better afterwards. But for the moment, Kelon shares are not appealing to institutional investors."

 

Qingdao-based Hisense has secured a 26.43-per-cent stake in Kelon Electrical Holdings for 680 million yuan (US$84.9 million), becoming its largest shareholder, but the stock transfer is still ongoing, the company said in the statement.

 

Hisense promised in its annual report that the company would immediately restructure Kelon once the transfer is completed.

 

The reshuffle measures include injecting the quality assets and business of Hisense's air conditioner section into Kelon, improving Kelon's financial status and credit.

 

(China Daily August 15, 2006)