Midas Holdings (MIDAS SP) - DBS Research 2018-02-09: Flags Out Several Irregularities In The Course Of Audit; Ceasing Coverage

Midas Holdings (MIDAS SP) - DBS Vickers 2018-02-09: Flags Out Several Irregularities In The Course Of Audit; Ceasing Coverage MIDAS HLDGS LIMITED 5EN.SI

Midas Holdings (MIDAS SP) - Flags Out Several Irregularities In The Course Of Audit; Ceasing Coverage

  • Irregularities in the course of audit.
  • Board is taking active steps to ascertain overall impact to the group.
  • Concerns on how larget the assets are at risk and potential corporate governance lapses will be an overhang.
  • Ceasing Coverage on the stock.

What’s New? 

  • Midas announced last night that during the course of audit and subsequent searches by its legal counsel, it has uncovered several litigations, enforcement orders and court documents involving companies within the Group. This includes an enforcement order filed against Jilin Midas Aluminium (its key subsidiary) for a previously undisclosed liability of RMB30m. Based on available information, about RMB 12m out of the unaudited ledger balance of RMB873m as at end 2017 was frozen by court orders. 
  • Additionally, several orders are outstanding which freeze certain shares owned by the Group, including shares in Luoyang Midas Aluminium and Dalian Huicheng Aluminium as well as its associate Nanjing Puzhen Railway Transport Co. 
  • Midas has also uncovered a number of previously undisclosed corporations related to certain Group companies incorporated in the PRC, but it is unable to confirm information on the shareholdings and businesses of these corporations.
  • Midas also announced that its Board is taking active steps to gather information on the court documents and previously undisclosed corporations and ascertain whether there are other transactions in order to assess the overall exposure and legal implications for the Group, and protect its assets.
  • The Board will also consider what actions should be taken to investigate the matters and determine whether any wrongdoings have been committed and any legal redress is available to the Company.
  • The Board is in the process of appointing Dr. Xu Wei Dong, an independent non-executive director, as the Legal Representative for all companies incorporated in the PRC, primarily as the custodian of legal seals to safeguard Group assets. All payments above RMB200,000 need Dr. Xu’s approvals. Any payment cumulatively exceeding RMB200,000 within 30 days has to be highlighted by the local CFOs to Dr. Xu. 
  • As the Company is still in the midst of fact findings, the Board will continue to do assessments on whether the Group can continue as a going concern. The Board will issue further announcements as appropriate, as and when there are any material developments in the matter.

Our take: 

  • A surprising development given Midas’ long listed and operating history. This looks like a severe lapse in internal process and controls and/or indicates serious corporate governance issues. 
  • Our immediate key areas of concern would be
    1. how large are the assets at risk (or still available to shareholders),
    2. whether the Group’s key businesses can continue to operate, and
    3. what were the corporate governance lapses involved and what legal redress is available, if any.
  • Given that we are not able to rely on the Group’s financial statements, it will be difficult for us to put a value to the stock. We suspend and drop coverage of the stock.

Paul YONG CFA DBS Vickers | http://www.dbsvickers.com/ 2018-02-09
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