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China Minzhong’s Trading Halted

stopHalloween came way too early for shareholders of China Minzhong Food Corporation Limited (SGX: K2N). Shares in the company plunged to a low of $0.50 yesterday. That was a 50.7% free fall on the back of Friday’s close at $1.015. The plunge triggered a halt from the company, pending the release of an announcement. Currently, it has been halted at $0.53, down 47.9%.

The share-price crash occurred after an American company, Glaucus Research Group, released a damning report of China Minzhong, suggesting the company’s shares are worthless.  Glaucus Research said in its report: “We believe that Minzhong, like Chaoda, has so significantly deceived regulators and investors about the scale of its business and its financial performance that we expect trading in its shares to be halted and its shares to be worthless”. Chaoda is a listed company in Hong Kong that has since been halted due to allegations of fraud.

Glaucus Research alleged that China Minzhong had faked sales to its top two customers, made up payments to its largest supplier, magnified its capital expenditures by up to RMB 1 billion and tried to cover up its accounting improprieties by falsifying its historical State Administration of Industry and Commerce (SAIC) financials.

They also felt that high earnings before interest, taxes, depreciation and amortization (EBITDA) margins, ballooning receivables and the negative cumulative free cash flow since going public rang the alarm bells.

In early March this year, Government of Singapore Investment Corporation (GIC) divested its entire stake in China Minzhong to Indofood, an Indonesian company involved in the food industry, at $1.12.

The company became public-listed in April 2010 and is now 56% below listing price of $1.20. Before yesterday, the lowest closing price for the shares was $0.53 on 8 June 2012.

The stock market is a place where opinions are rife. That, after all, is what makes a market. You may not always agree with the opinions of others, which is why it is important to understand as much as possible about the companies we might be interested in. By knowing as much about those companies we should be better able to develop our own investing thesis and judge if other investors have got it right or wrong.

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