Industrial Securities Faces Risk in Vaccine Scandal

The ripple effects of the vaccine scandal that enraged China’s public all the way up to President Xi Jinping are starting to affect financial institutions.

Industrial Securities Co., one of the country’s major brokerages, sued a major shareholder of the embattled vaccine maker Changsheng Bio-Technology Co. over 630 million yuan ($92 million) of loans taken out with Changsheng shares as collateral.

A court in southern China’s Fujian province accepted the brokerage’s breach-of-contract suit against Zhang Mingao and his spouse Zhang Qiucen, Industrial Securities said Monday.

Zhang Mingao is the son of Gao Junfang, chairwoman of parent Changchun Changsheng Life Sciences Ltd. and a vice chairman and a major shareholder of the scandal-ridden company. Gao and more than a dozen Changsheng executives were detained by police last month on allegations related to the vaccine scandal.

Changsheng was found to have falsified production documents for a rabies vaccine and sold more than 250,000 doses of a substandard vaccine for babies as young as three months.

Changsheng fabricated production records and product inspection records and arbitrarily changed process parameters for its rabies vaccine since 2014, according to findings from investigators sent by the State Council, the official Xinhua News Agency reported Tuesday.

Industrial Securities said Changsheng’s Zhang pledged a total of 74.9 million of the company’s shares between April and May for 630 million yuan of personal loans.

As Changsheng’s shares tumbled, Zhang has put up additional shares as collateral. As of July 23, Zhang had pledged 96% of his holdings in Changsheng, or 167 million shares, to Industrial Securities, according to the brokerage. At Changsheng’s price Tuesday of 7.41 yuan, the shares would have a market value of 1.24 billion yuan, or about twice the amount of the loan.

Meanwhile, Industrial Securities also holds 11 million Changsheng shares pledged by Yu Jupan, another major shareholder, for more than 45 million yuan of loans.

Changsheng’s Shenzhen-listed shares nosedived since the scandal broke out in mid-July. As of Tuesday, the company’s shares lost more than two-thirds of their July 13 value.

The stock exchange regulator on July 26 categorized Changsheng as a “special treatment” stock with the company’s business operations suspended, limiting the daily maximum movement in its share price to 5% instead of 10%. The exchange also restricted share sales by major Changsheng shareholders amid the investigation, meaning Industrial Securities will be unable to sell the shares.

On July 30, Industrial Securities told investors it would take legal steps to control its exposure to the borrowings and seek asset recovery. The company said Zhang and Yu have submitted lists of their assets outside Changsheng equities, including real estate and equities in other companies that can be used for debt repayment.

In response to questions from Caixin, an Industrial Securities source said the company hasn’t decided on a plan to deal with potential losses related to Changsheng.

According to company reports, Industrial Securities wrote off 336 million yuan for asset impairment in 2017, mainly due to losses from loans related to embattled tech firm Leshi Internet and Technology. In 2016, Industrial Securities’ asset impairment write-off was 9.7 million yuan.

Another brokerage house, Ping An Securities, also holds 49.4 million shares of a Changsheng-related company as loan collateral, according to company filing.

Contact reporter Han Wei (weihan@caixin.com)