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China regulator fines parent of BMW partner over false accounting

Huachen Automotive found to have cited inflated profits when selling bonds

BMW's top China executive said at the Shanghai auto show this week that the company's joint venture has not been affected by Huachen's troubles.    © Reuters

HONG KONG -- China's securities regulator has fined Huachen Automotive Group Holdings and a group of current and former executives almost $9 million over false and incomplete disclosures made during bond sales by the bankrupt corporate parent of BMW's local joint venture partner.

Last week, Brilliance China Automotive, BMW's Hong Kong-listed partner, revealed that it had discovered that subsidiaries had guaranteed 5.89 billion yuan ($905.91 million) in Huachen bank borrowings without authorization.

The latest disclosures involve two Shanghai-listed units of Huachen, car parts maker Shenyang Jinbei Automotive and Liaoning Shenhua Holdings, an auto distributor and retailer.

In separate filings, the two said that the China Securities Regulatory Commission had found that Huachen had inflated its profits for 2017 and 2018 by recording investment income from the sale of shares in certain subsidiaries even though the sales were not completed.

The inflated results, which obscured falling sales for Huachen's proprietary car brands, were used as the basis for raising 12.9 billion yuan in 11 bond issues on the Shanghai Stock Exchange and the country's interbank market.

According to the two units' disclosures, the CSRC found that Huachen had also failed to make timely and proper disclosures of changes in its credit rating, missed payment deadlines, litigation and arbitration cases and other matters which could have affected its solvency or value of its bonds.

The CSRC slapped a fine of 53.6 million yuan on Huachen, with another 2.98 million yuan in penalties levied against 12 former and current executives.

Former Chairman Qi Yumin drew the biggest such fine. He has been under investigation since December by the Central Commission for Discipline Inspection, China's most powerful graft buster.

The agency alleged Qi was "involved in serious violation of discipline and law," which usually implies that the case is related to some form of corruption but no further details of the allegations have been released.

Until recently, foreign automakers were restricted to 50/50 joint ventures with local state-owned partners if they wanted to build cars in China.

As with its peers, Huachen's BMW partnership has been a lucrative source of profit but it has long sought to develop its own brands, including Zhonghua, Jinbei and Huasong.

Falling sales of these brands has kept Huachen in the red since 2017, eventually leading to its filing for bankruptcy protection last November after it defaulted on domestic bonds.

As part of the bankruptcy process, the group's creditors met for the first time on Tuesday. According to local media reports, court-appointed receivers tallied 54.34 billion yuan in claims from 5,950 creditors.

Liaoning Shenhua said in its annual results filing on Monday that its sales of locally branded vehicles fell 48% last year to 6,064 cars, inflating its annual net loss to 755.59 million yuan from 252.73 million yuan a year before.

Shenhua said it had written off 126 million yuan last year in accounts receivable owed by Huachen and its affiliates. It also revealed that Huachen and its affiliates had funneled out 940 million yuan in cash in 2018 through various financial arrangements and another 345 million yuan the next year.

Shenhua said those arrangements have been resolved but that the Shanghai exchange had penalized the company, Huachen and seven of their executives for mismanagement of the listed company's funds.

The company was known until December as Shanghai Shenhua Holdings, a name well-recognized in Chinese securities circle as one of the original eight stocks listed on the Shanghai Stock Exchange when it reopened in 1990 for the first time since the Communist revolution.

Shenyang Jinbei also reported that Huachen's bankruptcy had led to a sharp increase in its impairment charges, especially for receivables, inventories and fixed assets. The company swung to a net loss of 454.75 million yuan last year from a net profit of 60.65 million yuan a year earlier.

Jochen Goller, BMW's China chief, told reporters on Monday at the Shanghai auto show that issues regarding Huachen and Brilliance China would not impact its joint-venture operations in China.

Analysts are not so sure.

Kelvin Lau of Daiwa Capital Markets in Hong Kong last week cut his rating on Brilliance China directly from "buy" to "sell" -- a four-notch drop by the company's scale -- "due to our concern about the corporate governance issue in the long run."

Jefferies' Alexious Lee trimmed his rating on Brilliance China to "underperform" from "hold" on Tuesday, citing similar worries over corporate governance among other issues.

Brilliance China shares were suspended from trading last month when the company said it would fail to file its annual results by a March 31 exchange deadline. Shares of Liaoning Shenhua and Shenyang Jinbei, which have both been hit by Huachen's bankruptcy, each slipped around 2% further on Wednesday.

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