By Goh Eng Yeow
Markets Correspondent
engyeow1@sph.com.sg

 

FORMER US Defense Secretary Donald Rumsfeld has an amazingly simple way of describing risks.

There are known unknowns and unknown unknowns, he declared in his recent memoir which was aptly named Known and Unknown.

Now, Libya is an unknown unknown. It is quite difficult to predict at this point in time how the increasingly bloody uprising against its leader Colonel Gaddafi, is going to pan out.

As such, the world’s financial markets are obligingly reacting in a knee-jerk fashion to every twist and turn in crude oil price as it reacts to each development in Libya.

And when US Fed chairman Ben Bernanke stated the obvious that high oil prices will spook the fragile recovery in the US economy last night, Wall Street promptly plummeted on the news.

But in our own backyard, we have a known unknown – China Hongxing Sports.

For a few years now, pointed questions have been raised about its reluctance to pay out a good dividend to shareholders, even though it was sitting on an apparently huge cash hoard.

Better still, as I pointed out in today’s news analysis, its auditors for the past five years suddenly quit in October.

That, by itself, is an ominous development. Now to replace auditors just before an annual audit is conducted, a company has to convene a meeting of its shareholders to explain its reasons for doing so.

With the benefit of hindsight, it appears that the company’s shareholders had waved the change through, without probing the management deeply enough about such an abrupt change.

SUSPENDED

Still, I am amazed by the anguish expressed by them, when it was suspended from trading last week.

Some of these investors also wanted trading in the stock to continue, presumably to give them an opportunity at least to try to liquidate their ill-starred investment.

Having covered the markets for more than two decades now, I agree with the Singapore Exchange’s stand that allowing China Hongxing to carry on trading will hurt investors even more.

One key feature of our caveat emptor regime or "buyer beware" regime is to ensure a smooth flow of information so that investors can make an informed decision on whether to buy or sell a stock.

But when accounting irregularities appear on a company’s books, it is simply impossible to make any informed decision. Those who want to take their chances in the face of such unknowns, should really try their luck at the two casinos.

In any case, Sino-Environment provides one good example as to why trading in a troubled counter should have ceases, until all the problems had been sorted out.

Some readers will recall that I wrote a commentary in November 2009 asking why the counter was allowed to trade for six months, after it was obvious that it would be brought down by the problems engulfing it.

And while these investors were happily trading the stock, a subsequently released PWC report showed that the management made a number of further questionable deals. Sometimes, allowing a troubled counter to trade, may lull investors into a false sense of security that everything is well when it is not.

In today’s news analysis, I also mentioned that China Hongxing took a stodgy five months to report a series of sales by a then-substantial shareholder, JF Asset Management.

In September 2009, I had spotted the delay in the disclosure and pressed the company hard for an explanation.

At the back of my mind even then, I was quite disturbed by such a big lapse in disclosure, given the ugly precedent established by another failed company, China Sun Bio-chem, which also failed to promptly disclosed details of sales of its shares by Temasek Holdings some years earlier.

I do not want to wade into the huge debate over the reliability of analysts' report, following the tiff between Olam International and a CLSA analyst over her analysis of the company’s accounts.

But it takes a brave analyst any time to make a sell call when everyone in town is wildly in love with a stock.

And while traders like to boil down everything to a simple buy or sell call, the truth is that things are not so simple. I can only say that the devil is in the details. Things are never quite in black and white.