Caixin
Jul 03, 2020 03:00 AM
FINANCE

Where Did Tunghsu Group’s $7 Billion of Cash Go?

Tunghsu Optoelectronic Technology Co. failed to repay more than 2 billion yuan of notes last year even though it had 18.2 billion of cash and cash equivalents on its books.
Tunghsu Optoelectronic Technology Co. failed to repay more than 2 billion yuan of notes last year even though it had 18.2 billion of cash and cash equivalents on its books.

A Chinese maker of electronic display panels swung from an annual profit of 1.2 billion yuan ($172 million) to a loss of 31 billion yuan, raising questions whether the debt-ridden company cooked its accounting books.

The huge loss at Tunghsu Group Co. was not surprising after the company in November was unable to repay more than 2 billion yuan of principal and interest on two notes, citing “short-term liquidity difficulties.”

But a closer look at the company’s accounting books shows its cash and cash equivalents fell by 50 billion yuan and accounts receivable rose by more than 55 billion yuan in 2019. A bond trader at a brokerage said this was more than a coincidence and said he suspected the company moved previously nonexistent cash and cash equivalents into accounts receivable.

Beijing-based Tunghsu mainly produces photoelectric display components but also operates new energy, real estate and other businesses. In November, one of its three listed units, Tunghsu Optoelectronic Technology Co., failed to repay 1.8 billion yuan of principal and interest on a note because of tight liquidity, even though the company had 18.2 billion of cash and cash equivalents. It also missed a 41 million yuan interest payment on another bond.

Following the bond default, the Shenzhen Stock Exchange asked Tunghsu Optoelectronic to explain why the payments were missed as the financial statements showed the company had a substantial amount of cash at the end of September. But the company never responded.

The parent company’s annual report showed that it had less than 7 billion yuan of cash as of the end of 2019, down from 56 billion yuan at the end of 2018 and 36.9 billion yuan at the end of June. Meanwhile, the company’s accounts receivable jumped to 66 billion yuan from 10.3 billion yuan the previous year.

Among the top five companies that owed money to Tunghsu are its controlling shareholder Tunghsu Optoelectronic Investment Co. and Longyue Industry Group, an agriculture conglomerate founded by Shanxi billionaire Tian Wenjun.

In 2017, as Longyue was mired in 36 billion yuan of debt, Tunghsu and two other companies jointed a Shanxi government-led debt restructuring to take over more than 20 billion yuan of Longyue’s debt in exchange for getting loans from local banks. Caixin learned that Tunghsu got nearly 20 billion yuan of loans from 57 small and medium-sized banks in Shanxi.

Some have raised questions on the authenticity of the nearly 13 billion yuan of accounts receivable owed by Longyue. Tunghsu’s auditor, Zhongxingcai Guanghua Certified Public Accountants LLP, issued a disclaimer of opinion, saying it had not obtained evidence to determine the nature of the payments receivable and its impact on the company’s cash flow. The auditor also issued a similar opinion on payment receivables owed by Tunghsu’s two shareholders.

“If I were the auditor, I wouldn’t just give a disclaimer of opinion,” said a partner at a large accounting firm. In normal business operation, a company the size of Tunghsu shouldn’t have such a dramatic fluctuation in cash, he said. A more plausible explanation is that it used the cash as financing for related parties, or its previous cash and cash equivalents didn’t exist at all, the accounting expert said.

Besides accounts receivable, the auditor also issued a disclaimer of opinion on Tunghsu’s advance payment, investment income, external guarantee and other contingencies.

As of the end of 2019, the company recorded advance payments of 3.5 billion yuan, but the auditor said after inspecting business contracts that it had not obtained audit evidence to judge the reasonability of the transactions and whether the contracts would be completed as agreed.

Tunghsu said it had 138 billion yuan of investment income from its 48.5% stake in Tibet Financial Leasing Co. Ltd., which is in serious debt default and has been sued by several lenders. The auditor said it couldn’t confirm whether the investment income was real.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com)

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