E&Y Suspends the Audit of Zungui (waiting for the other shoe to drop)

Does E&Y read The Truth is in the Details?  I doubt it, however less than one month after I first raised red flags regarding Zungui in my post here and here, E&Y has suspended the audit of the Company’s financial statements for the year ended June 30^th 2011.

Shares of Zungui finished down 77% on the day after the stock was halted pending a news release.

“Ernst & Young LLP ("EY") has advised the Audit Committee of the Company's Board of Directors that it has suspended procedures with respect to the audit of the Company's financial statements for the year ended June 30, 2011 until the Company clarifies and substantiates its position with respect to issues pertaining to the current and prior year which EY has identified in the course of EY's audit work. EY recommended that the issues identified be addressed by an independent investigation.”

For now we will wait on the results of the independent investigation but if Sino-Forest is any indication we may be waiting a while.

Graham

The Truth is in the Details (and one of the details has just been removed)

I have never participated in stock discussion boards, but the discussion about this blog and Zungui at Stockhouse.com is becoming increasingly entertaining.

http://www.stockhouse.com/Bullboards/SymbolList.aspx?s=ZUN&t=LIST

So apparently someone has emailed the CFO Shelly Gobin about the comments made on this blog and this is Shelly’s alleged reply.

I have seen the blog. I cannot answer if this is impacting the stock (which are very volatile these days) but the comments made in the blog are not accurate. Our business model is different than LiNing's and we operate in lower end segment of the market. This has been clearly communicated in our prospectus from December 2009. Our capital expenditures have also been detailed out in the MDA's we have disclosed. There are inaccuracies in the blog on these matters as well. Unfortunately, people are allowed to blog whatever they like without any verification or even reading of our public documents.


The Chinese website is not used for day to day business. We do not sell our products online - they are only sold in ZUNGUI stores. The article is correct that the website is out of date and some links are not working. This is a valid point and I will follow up with the IT department in China to correct that. I believe the logo that the article highlights is not accurate - all of our products are branded with the ZUNGUI logo. The picture appears to have been altered from the catalog that is available on the website.www.zunguihaixi.com that is used for investor relations. This website is also being update to provide some more information on Zungui but does contain all of our corporate documents, press releases, etc.

Zungui Haixi Corporation has a very high standard for corporate governance and I would be happy to answer any questions you may have. I did leave you a message at the number you provided below. I would be happy to discuss further with you if there is a convenient time to reach you.

Thank you.
Shelly

 

Of course the picture I posted on my blog earlier was not altered and enough people have seen the picture on the website to know that I did not alter it.

But regardless, I have just checked the Zungui website and the Diesel logo has just been removed and Zungui’s high standard for corporate governance has been restored. We can all sleep easy now.

Graham

P.S

This still has to be the ugliest shoe I have ever seen.

Response to Comment on Migao

In the comment section below on my last post on Migao someone has raised two valid arguments in defence of Migao. I am happy that someone has brought these points forward because as I will point out although these arguments appear valid at first, upon deeper investigation, they are not really valid at all.

The first argument is that the potash deal is ‘legit’ because the CEO has pledged $95M in his own shares to restore investor’s confidence in the potash agreement and to protect against possible default from the mystery supplier

There are two things fundamentally wrong with this however.

1)      We will never know whether or not the potash supplier did default on the agreement. It is not the auditor’s duty to confirm where supplies of potash came from and therefore Migao could tell us that supplies of potash came from this mystery supplier and we would never be able to prove it one way or the other.

2)      The second reason why this pledge means essentially nothing is that as discussed in the post below if the transaction is fraud then the shares are essentially worth nothing anyways and therefore the CEO’s pledge is essentially worth 0.

The second argument in defence of Migao is that insiders have bought over $1.4M shares in the last month.

I believe that this is just a little bit window dressing. As per this article, the amount of purchases compared to sales is clearly insignificant and the article states that the ratio of shares sold to shares purchased was 65 to 1 back in March. So clearly these share purchases are insignificant when looking at the whole picture.

The same thing could be said about their share buyback program that they announced. It will be interesting to see how many shares they actually buyback. This wouldn’t be the first time an alleged Chinese fraud has announced a share buyback program.