January 9, 2013 / 3:00 AM / 5 years ago

Zoomlion shares hit four-week low amid report of accounting irregularities

HONG KONG (Reuters) - Hong Kong-listed shares of Zoomlion Heavy Industry Science and Technology Co Ltd (1157.HK) fell more than 9 percent in resumed trade on Wednesday to hit their lowest in four weeks, even after the Chinese construction equipment maker denied a report of irregular accounting.

Local newspaper Ming Pao Daily News reported on Tuesday that it had received an anonymous letter, questioning Zoomlion’s sales growth figures in the first quarter of 2012 and alleging inflated revenues by including potential orders as sales.

The author of the letter said a copy had also been sent to Hong Kong’s Securities and Futures Commission, although the commission said it did not comment on individual cases.

In a filing to the Hong Kong bourse late on Tuesday, Zoomlion said all allegations relating to its financial information as reported in the Ming Pao report were false, groundless and misleading.

“The company has never recognized potential purchase orders as sales, nor has it ever fabricated any fictitious sales in which the existing clients are disguised as some other clients as alleged in the press article,” Chairman Zhan Chunxin said in the statement.

Shares of Zoomlion were down 5.6 percent as of 0236 GMT, after touching a low of HK$10.7, their weakest since December 14 and lagging a 0.5 percent gain in benchmark Hang Seng Index .HSI. Zoomlion's (000157.SZ) Shenzhen-listed shares were down 3.3 percent.

“While management has clarified the situation, we think investors may take a more cautious approach in assessing the company’s financial outlook until its FY12 financial results in March 2013, and this may hold back share price performance,” HSBC wrote in a research note.

“The bad press could cause short-term share price weakness, but we think this should present a buying opportunity,” HSBC said, adding that Zoomlion was better placed than its peers in the Chinese construction machinery sector given its market-leading position in concrete machinery and strong balance sheet.

    Short-sellers - who borrow stocks and then sell them in the hope they will decline, so they can buy them back at a lower price - have targeted Chinese companies, bringing several to their knees with allegations of fraud and wiping out billions of dollars of shareholder value.

    “We must say the allegation is easily refutable by anyone with basic accounting knowledge. Most important, in our view, it is hard to imagine a company with both A and H listings and two audit firms (KPMG and Tianzhi) would book revenues from orders not yet signed to inflate sales,” Credit Suisse wrote in a note. “If the revenue recognition does not follow the published method, it is easily detectable by auditors.”

    Zoomlion said its interim results for the six months ended June 2012 were prepared in compliance with international accounting standards and, even though it was unaudited, the report had been reviewed by KPMG.

    KPMG did not immediately respond to a request for comment.

    Reporting by Donny Kwok; Editing by Anne Marie Roantree and Chris Gallagher

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