The dramatic collapse of Kelon chairman Gu Chujun

(By staff reporters Long Xueqing, Lu Yanzheng, Yuan Ling and Cheng Zhe)

Kelon Electrical Holdings Co., almost 15 years to work his way up from an entry-level technician to a tycoon with several large refrigeration and appliance companies under his belt. But since the government arrested him in July for “economic crimes” – he is accused of embezzlement and fraud, among others – he has watched his carefully-spun schemes unravel within a matter of months.

The future of the once-famed Kelon is now very much in doubt, and that may be just the beginning of Gu’s woes. has found evidence that he engaged in a succession of fraudulent schemes involving several of his companies, buying government land on preferential terms to use as collateral to secure numerous bank loans, allegedly to start companies that have never begun production.

Gu launched a promising career in 1990, at age 31, when he patented his first refrigerant technology. He struggled in the domestic market for over a decade before moving to Hong Kong, where he established Greencool Technology Holdings, a company listed in Hong Kong’s growth enterprise board. In 2001, he returned to the mainland and purchased the famous Kelon via Greencool. As chairman of Kelon, a domestic appliance giant with assets then valued at 6.6 billion yuan (US＄814.8 million) and yearly revenues of 4.38 billion yuan (US＄540.7 million), he masterminded a series of domestic acquisitions that would rapidly expand his commercial empire. Four years later, those endeavors have ended in his July 29th arrest.

Even shortly before his arrest, Gu was still proclaiming his innocence. But evidence will likely demonstrate otherwise.
Kelon’s revised mid-year report, released in August, shows that the company inflated 2004 profits by 112 million yuan (US＄13.8 million) and suffered a loss of 487 million yuan (US＄60.1 million) in the first half of 2005. From January to June last year, it turned a profit of 159 million yuan (US＄19.6 million).

Kelon was founded in 1984 as a township government-controlled enterprise. In 1996, the state-owned Guangdong Kelon (Ronshen) Group bought 41.96 percent of its shares; Kelon employees took 10.49 percent, with the remaining shares trading on the Hong Kong market. At its height in 1997, Kelon held a 20 percent share of the domestic refrigerator market, with revenues of 3.4 billion yuan (US＄419.8 million) and a profit of 660 million yuan (US＄81.5 million).

But its impressive performance was masking deeper problems, said a high-ranking Kelon manager who declined to be named. In 2000, after intensified domestic competition and mismanagement plunged Kelon deep into the red, Gu began negotiating to buy the company.

When negotiations reached their final stage in July 2001, Gu sent a takeover team to Kelon, but Kelon’s management rejected it. In October, Gu established the Greencool Enterprise Development Co. (GED), which then bought those Kelon shares under Kelon (Ronshen) Group’s control. These accounted for approximately 20.64 percent of Kelon’s total shares, at 2.73 yuan (34 US cents) per share; Kelon’s net assets per share were 4.17 yuan (52 US cents), according the company’s 2001 mid-year report.

“The company was in a dire crisis,” said a former Kelon manager, who requested that his name not be used. “It was just like what has happened on the heels of Gu’s arrest now.” Kelon reshuffled its board of directors, but the takeover had shaken the confidence of its creditor banks. Local braches of China Construction Bank and Bank of China sued Kelon for non-payment of overdue loans. When a December, 2001 Magazine article exposed suspicious claims in Kelon’s annual report, the company’s stock prices plummeted the day of the article’s publication.

Gu managed to renegotiate with the government to cut the acquisition price to 1.7 yuan (21 US cents) per share, reducing the total cost by 212 million yuan (US＄26.2 million). After the municipal and provincial governments had helped Kelon persuade other banks to provide emergency loans, GED officially acquired the struggling company in March 2002.

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With Kelon successfully under his belt, Gu set his eye on expanding into other provinces. In June 2002, he established the Jiangxi Greencool Industrial Development Co. Ltd. (Jiangxi Greencool) and Jiangxi Kelon Industrial Development Co. Ltd (Jiangxi Kelon) in Nanchang, Jiangxi Province. Jiangxi Greencool had a registered capital of US＄24 million; its shareholders were two of Gu’s private companies, registered in Tianjin and the British Virgin Islands. The Tianjin company invested US＄10.8 million in cash, while the British Virgin Islands company contributed US＄1.2 million in cash plus US＄12 million from the value of a patent owned by Gu, which was estimated at US＄15.21 million. (This same patent was later used as collateral to back several of Gu’s other companies simultaneously.)

In September, another of Gu’s private companies registered in the British Virgin Islands paid 4.76 million yuan (US＄587,700) to purchase a piece of land from the local government. Two months later, the land value was re-estimated at US＄56.89 million, almost one hundred times its transaction price. US＄51 million from that latter estimate was claimed in Jiangxi Greencool’s assets. In July 2004, Gu appended another patent’s value, estimated at US＄20 million, to the company’s assets, making it appear to be the largest overseas investment project in Jiangxi with a registered capital of US＄95 million. But Gu’s total real investment into the Jiangxi Greencool endeavor was a mere US＄12 million in cash, plus the land he had purchased at US＄587,700.

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The second company, Jiangxi Kelon, may have been little more than a venue for Gu to maneuver capital; Gu allegedly used it as a front for Kelon’s sales revenues in East China. According to a former Jiangxi Kelon accountant, all of Kelon’s East China revenues were directed through Jiangxi Kelon; from there, the company funnelled a percentage directly into Gu’s pocket. The amount of this graft has not yet been determined.

As evidence of suspicious activity, has found that Gu established a number of “shell” companies in Nanchang. There were significant fund flows between the accounts of these companies, which did not engage in any industrial operations. Under Gu’s direction, Jiangxi Kelon had promised the Nanchang government a production level of 1.5 million units in 2003 and 1.6 million in 2004, thus creating 10,000 local jobs. But it fell far short. In 2003 the company employed 1,300 workers and produced nothing; its 2004 production was a mere 500,000 units, less than one-third the amount promised. “They (Gu and his managers) did not keep their word,” said Zhou Guan, vice mayor of Nanchang.

Insiders told that Jiangxi Kelon’s efforts to ramp up production had been hampered by insufficient input. Because parts and accessories had to be shipped from Guangdong for assembly, Jiangxi Kelon faced significantly higher production costs than its competitors. “This is fatal given the fierce competition in the sector,” said a high-ranking manager of the company.

But the company’s leadership wasn’t the only one to blame for its failures. The local government had played an active role in coordinating loan-granting negotiations between Jiangxi Kelon and local banks, which had lent to the company without requiring collateral and had transferred land on preferential terms. “You cannot say that the government is not involved,” one local bank officer said.

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In May 2003, Gu expanded his reach into the electrical appliance market, purchasing 20.03 percent of Hefei Meiling Co. Ltd. shares for 207 million yuan (US＄25.6 million) and becoming its major shareholder. Meiling is a listed electrical appliance maker based in Hefei, Anhui Province. In 2001, it ran into trouble after making a loss of 350 million yuan (US＄43.2 million) and decided to sell some of its shares. Although Meiling announced last March that Guangdong Greencool (formerly Gu’s Shunde-based GED) had concluded the deal, it remains unclear whether Gu has yet paid in full.

As with Jiangxi Kelon, Gu and his company received cheap land from the government for the Meiling venture’s production base, which claims a production capability of 4-5 million refrigerators a year. As of July, 2004, local securities regulators began to probe into Meiling and found a series of irregular deals.

In April, the China Securities Regulatory Commission sent a team to investigate the sources of the funds Gu used to purchase Meiling shares. Results have not yet been released. Xue Hui, secretary of board of directors of Meiling, told on August 3: “We are told to explain to the media that ‘the CSRC investigations have found no illegal fund transfers directed by Gu.’”

Gu has apparently followed similar strategies in his capital maneuvers in Yangzhou, Jiangsu Province and Xiangfan, Hubei Province. He established the Yangzhou Greencool in June 2003 with a registered capital of 1 billion yuan (US＄123.5 million), a figure that includes the value of his technology patents. The firm produced nothing that year. In December 2003, Gu purchased 60.67 percent of Yangzhou Yaxing Motor Coach Co. Ltd. for 418 million yuan (US＄51.6 million). After Gu was detained in July, the Yangzhou municipal government claimed that it had, in fact, received these funds in full; where that money came from is still not clear. In July 2003, Gu also registered Yangzhou Kelon’s refrigerator-manufacturing capacity to be 500,000 units per year. But that company also has yet to begin production, and has contributed little to tax revenues or the local economy.

Gu also transferred funds from Yaxing to Yangzhou Greencool. According to Yaxing’s official documents, 63 million yuan (US＄7.8 million) was transferred to Yangzhou Greencool in May under Gu’s direction.

In Xiangfan, Yangzhou Greencool purchased 29.84 percent of the Xiangyang Automobile Bearing Share Company Ltd. (XAB) shares at a low price and became its controlling shareholder. Although many of the company’s bad assets had been divested, its performance has not improved significantly with Gu at the helm.

In August, Larry Lang, a financial economics professor with Chinese University of Hong Kong, accused Gu of overstating profits and engaging in dubious deals to purchase state assets at a discounted price. Lang’s claim has sparked hot debate among mainland scholars, and the state has begun to investigate the case.

Meanwhile, Gu’s endeavors are in trouble. The Hong Kong stock exchange has accused Greencool of violating trading rules. Kelon’s bank creditors are pushing hard for repayment of numerous loans, and several suppliers have claimed arrears against the company. Additionally, XAB and Meiling claim to have stopped deals with Gu, and his shares in Yaxing have been frozen.

intern Su Dandan contributed to this story.
English version by Xin Zhiming and Lauren Keane