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Shares outperform despite scandal

By Hui Ching-hoo (China Daily)
Updated: 2006-09-08 09:40

Zhang was alleged to have illegally borrowed 3.2 billion yuan (US$402 million) when he was in charge of Shanghai Fuxi Investment, which holds an 8.15-per-cent stake in Shanghai Electric.

While Han was allegedly involved in misappropriating millions of yuan in employee benefits and pension funds in 2004.

Shanghai Electric yesterday released an announcement clarifying that the company's financial situation remains healthy and the investigation is mainly focused on the personal misconduct of the three former directors rather than the company's assets.

"The investigation is related to Wang's personal acts and has no connection with his former role as a representative of the company," it said in the announcement.

It also mentioned that the company launched an internal review, which has found that the group's assets have not been affected by investigation.

Further, in order to ensure the company's assets have not been dissipated, the audit committee appointed one of the big four international accounting firms to carry out a review of the company's accounting records. A report from the review is expected to be released by the end of the year.

Since the scandal broke, Shanghai Electric has announced Huang Dinan as executive director as a temporary replacement for Wang. In the interim result meeting last month, board members decided to appoint Xu Jianguo as chairman-designate, taking over Wang's job.

Analysts said that the management scandal would have a brief negative effect on the company's image and hit investor confidence.

"It will surely shake investor's confidence," said Lai Wai-shing, an independent analyst in Hong Kong.

Ricky Cheung, fund manager for Phillip Capital Management (HK), said the company's business will be inevitably tainted by the scandal and investors will be more cautious about buying its shares.

But the financial ratio and interim result remained strong a positive signal for investors in the long term, they said.

Shanghai Electric posted 1.17 billion yuan (US$146 million) in net profit in the first half of 2006, an increase of 42 per cent year-on-year.

Cheung said if the company proved that its business has no connection with the scandal, its shares will still be attractive because of the low P/E (price-to-earnings ratio) and remarkable interim profit growth.

He suggested investors might consider whether to buy shares when the company's year-end result is released.

Lai also said through the case, mainland regulators have shown their determination to improve corporate governance in State-owned enterprises. He spoke highly of the drafting of regulations to constrain the power of CEOs, which could lower the chance of executives misappropriating company assets.