Things seem to be moving forward with Greenstar. They are still not out of the woods but it was a big relief to know that the CFO, who flew over to China, confirmed the story of the CEO and that there's nothing else going on. It was my biggest fear that there was more than meets the eye with this crisis....and there still may be, but such fears have been quelled given recent news. Major hurdles have been cleared. Now that the finance chop has been replaced the audit can be completed and it should be a matter of short time before it gets done and the financials can be filed. Management is targeting the end of the month but don't be alarmed if it ends up taking a little longer. There's a few moving parts for this thing to get done and so the company probably needs a little good fortune for all to go smoothly. One possible remaining concern is the cash in the bank. Was there any funny business going on with the cash while the controller had possession of the finance chop? It's highly unlikely as it requires both the finance and legal rep chop to make transactions. So, the only way the cash was tampered with is if the controller and CEO were conspiring and that too seems quite unlikely. If that was the case, I don't think the CEO would have been cooperating with the board the way he has as well as supporting the company with his own money (the bank accounts are frozen without the finance chop). If he was guilty of wrongdoing I think he would have behaved a lot differently and pulled the plug much like what the CEO at APX did.
If and when the financials are filed, I suspect the company will also have to provide an explanation to the regulators as to how they intend to ensure that a similar crisis will not happen again before trading gets reinstated. As mentioned in a prior news release, the company has plans, but will they be enough to satisfy the regulators? That is another remaining risk but I don't think it's one to be overly concerned about.
As I stated last post, if Greenstar can survive this crisis they could end up being stronger as a result. In completing the audit, they will have satisfied higher standards as per the mandates being enforced by CPAB which I also touched upon in my previous post. They will have identified and corrected a major weakness to their corporate structure and I'm quite sure they will also be examining other potential weaknesses and take a proactive approach to address them as well. They will do everything they can to win back investor trust. However I'm sure some people are not going to look at this way. There will be those who will take a pessimistic view and claim Chinese companies can't be trusted no matter what. There are bitter shareholders out there I'm sure, who will be eager to sell at some point if and when trading resumes. I will not be one of them.
This crisis as serious as it is, did not involve fraud nor has it harmed the company's operations or prospects in a material way. From what I can tell, there have been no major disruptions and the Canadian acquisition is still on the table. People make mistakes. Some mistakes are forgivable others are not; in my opinion this is the former. The CEO Guan appears to be mainly at fault here for letting the situation with the controller get too far out of hand and didn't inform the board until it was too late. I think he learned his lesson here and deserves a second chance. Let's hope he gets one.
Tuesday, June 24, 2014
Friday, June 6, 2014
Crisis
It's been an absolute nightmare for me since my last post given the events of Greenstar. I didn't want to talk about it until there was sufficient facts. On April 28th Greenstar announced they would not be releasing their year end financials on time because the auditors were not able to complete their audit procedures. It was later revealed that the reason for the delay was corporate governance and admin deficiencies due to an internal dispute between certain members of the company's finance department led by the controller and the CEO. They basically want more money and the controller has took possession of the finance chop a.k.a seal to gain leverage. Without the finance chop the company is unable to access any banking and tax information which is necessary to complete the audit. The CEO is in possession of the more important legal representative chop. He has the ability to replace the finance chop and the company is in the process of doing so. Once that's done, the company could move forward with completing the audit.
Here's my take on this fiasco. First and most important of all, the delay in the audit was never an issue of fraud. I'm quite sure this is what everyone initially feared when this mess first started. This situation clearly exposes the vulnerability of a Chinese company being hijacked by its employees and that is a negative that can have a permanent impact even if the company survives this, however, the company did say that they are taking steps to ensure such a thing is avoided in the future. Well, they better because this situation just gave people another good reason to be skeptical of Chinese companies. This hijacking however is not nearly as serious as what happened with a couple of other Chinese companies like APX whereby it was the founder/CEO who had a falling out with their board of directors in Canada. That would be a disaster as the founder/CEO has the vital chops in his possession and owns a large percentage of shares and it's very difficult for a board to have the CEO and chops replaced. The situation with Greenstar seems fixable given that the CEO is being cooperative with the board and has the ability to replace the finance chop. The rouge controller doesn't have absolute power over the CEO nor does he own shares. The fact that the company expects to have the audit completed by the end of June is also reassuring and suggests the wheels are in motion. As serious as a trade halt by the OSC is, it was standard procedure given that the company was late in both the filing of the year end and q1 financials which were due end of May. They didn't halt because they suspected any wrong doing aside from the absence of the financials.
A key question I'm looking to get answered is why did the finance department want to get paid more? If I had to speculate what the answer is it would be this. I believe Greenstar may have been subject to higher auditing standards this year as per CPAB (the auditor's regulator). CPAB has demanded that auditors use higher verification standards for emerging market companies given Sino Forrest and some other scams in recent years. So if Greenstar was subject to higher auditing standards this year and were caught flat footed, there would suddenly be a lot more work required by the finance/accounting department and more importance attributed to them as well. This would give them the justification or leverage they needed to demand more pay at such a critical time. Again, all of the above is speculation on my part and it's best to keep such at a minimum.
The bottom line for me is that this is a serious situation but it's not as dire as many people on the message boards make is seem. There is the possibility of more negative surprises to come which would lead to a permanent downward spiral but as things stand right now, the issues seem fixable. If the company does survive this ordeal, they will have to deal with the fact that mgmt's competency has suffered huge damage which would take time...a lot of time, to recover from. To restore confidence, mgmt will have to take very strong remedial actions with respect to corporate governance to ensure such a crisis doesn't happen again and do shareholder friendly things like a buyback and/or dividend hike. Such actions would make Greenstar emerge stronger from this crisis which is the potential silver lining to this, but no sense in looking too far ahead at this point. It's do or die for Greenstar and for me these next few weeks.
Here's my take on this fiasco. First and most important of all, the delay in the audit was never an issue of fraud. I'm quite sure this is what everyone initially feared when this mess first started. This situation clearly exposes the vulnerability of a Chinese company being hijacked by its employees and that is a negative that can have a permanent impact even if the company survives this, however, the company did say that they are taking steps to ensure such a thing is avoided in the future. Well, they better because this situation just gave people another good reason to be skeptical of Chinese companies. This hijacking however is not nearly as serious as what happened with a couple of other Chinese companies like APX whereby it was the founder/CEO who had a falling out with their board of directors in Canada. That would be a disaster as the founder/CEO has the vital chops in his possession and owns a large percentage of shares and it's very difficult for a board to have the CEO and chops replaced. The situation with Greenstar seems fixable given that the CEO is being cooperative with the board and has the ability to replace the finance chop. The rouge controller doesn't have absolute power over the CEO nor does he own shares. The fact that the company expects to have the audit completed by the end of June is also reassuring and suggests the wheels are in motion. As serious as a trade halt by the OSC is, it was standard procedure given that the company was late in both the filing of the year end and q1 financials which were due end of May. They didn't halt because they suspected any wrong doing aside from the absence of the financials.
A key question I'm looking to get answered is why did the finance department want to get paid more? If I had to speculate what the answer is it would be this. I believe Greenstar may have been subject to higher auditing standards this year as per CPAB (the auditor's regulator). CPAB has demanded that auditors use higher verification standards for emerging market companies given Sino Forrest and some other scams in recent years. So if Greenstar was subject to higher auditing standards this year and were caught flat footed, there would suddenly be a lot more work required by the finance/accounting department and more importance attributed to them as well. This would give them the justification or leverage they needed to demand more pay at such a critical time. Again, all of the above is speculation on my part and it's best to keep such at a minimum.
The bottom line for me is that this is a serious situation but it's not as dire as many people on the message boards make is seem. There is the possibility of more negative surprises to come which would lead to a permanent downward spiral but as things stand right now, the issues seem fixable. If the company does survive this ordeal, they will have to deal with the fact that mgmt's competency has suffered huge damage which would take time...a lot of time, to recover from. To restore confidence, mgmt will have to take very strong remedial actions with respect to corporate governance to ensure such a crisis doesn't happen again and do shareholder friendly things like a buyback and/or dividend hike. Such actions would make Greenstar emerge stronger from this crisis which is the potential silver lining to this, but no sense in looking too far ahead at this point. It's do or die for Greenstar and for me these next few weeks.
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