Financial Analysis and adverse opinion from auditors for a SGX counter:

Recently there has been an uproar about the presentation of financial statements from some companies listed in SGX.
China HongXing recently has been suspended due to the fact that they have noted irregularities in the cash and bank balances, accounts receivables, accounts payables,and other expenses during the course of their audits.

Frankly speaking, China HongXing is in my pending to buy list based on the facts that by just merely scanning through their past 5 years finance statements, I found that the stock is currently trading below their net asset value. Plus they have lots of liquid cash in their holdings and manage to give out dividends during bad economic times.

Next on 9 Sept 2010, HongXing has published an article stating that it secures an order of about 1 billion RMB in trade fair. The company has also stated it secures a few contracts in the trade fair. It seems that this company is doing very well.

However on Oct 14, the company auditors resign (A Red Flag) followed by on Feb 21 2011, it announce the resignation of the assistant secretary (Another Red Flag).

25 Feb 2011 announced halt and a week later, counter suspended for trading. All these information can be found in SGX, under company announcements section, therefore the figures are accurate at the point of time when i retrieve the statements from SGX website.

This proves to be a wake up call for me. Initially i told myself this counter may be a good buy based on the attractive reasons i have listed above. After trading for so long, i realized that i started to skip to check if the accounts are manipulated before i start to analyze the estimated fair value of the counter.
Therefore i started to analyze the company again to check what are the red flags in the statements. The list below are what i have found out.

• For Year 2008 and 2009, the company has been presenting their non audited annual statements
• Negative free cash flow from year 2005 to 2008 and with a sudden increase of FCF in 2010
• Inventory increase by 20 days in year 2009
• In Yr 2008, statement states a negative CFO. In Yr 2009, it suddenly states a 400% increase
• The sudden increase in their Prepayments, Deposits and Receivables with RMB528,000 in 2006 to RMB278,665 in 2007. A cont increase of 300% in 2008 and suddenly a drop of 90% in 2009. It states that these prepayments are for distributors. I suspect future prepayments are include in 2007 and 2008, which cause 2009 to have less prepayments and increase the CFO
• Furthermore there is no explanation regarding about Prepayments, Deposits and Receivables.
• Based on the past years balance sheet, the accruals in liabilities are increasing  every yr except in yr 2009 with a sharp decrease of 40%.
• Suspect that the company is creating of cookie jar reserves in liabilities. The decrease in liability and expense will increase the net profit in the income statement and inflate the CFO.

My analysis above are based on my calculations and assumptions. Therefore i'm not responsible for any errors. However if any of you guys find that there are discrepancies in my analysis, pls do comment on it so that i can improve or learn something new.

Coming to the end of this topic, this suspension really woke me up and I'm glad i realize this mistake which leads me to put more efforts into fundamental analysis to reduce the probability of making errors. However who never make mistakes? Only through errors, i can improve in my analysis.
So to all people who practice fundamental analysis out there. If you do make mistakes here and there, take it as a lesson. Don't give up. A person who never makes mistakes is never consider a season veteran. :)