China Lumena New Materials Corp., which says it has the world's largest manufacturing capacity for polyphenylene sulfide resin, has suspended its stock trading and delayed its annual financial report after being hit with allegations it dramatically overstated sales.
The Chengdu, Sichuan Province-based Lumena denies the allegations, contained in two recent reports from analysts that accused the company of making “numerous material misrepresentations,” including that its sales and profits from PPS were 90 percent less than it claimed.
Lumena, in an April 4 filing to the Hong Kong Stock Exchange, strongly disputed the claims made by Glaucus Research Group and Emerson Analytics. It said Glaucus stood to gain financially if Lumena's share price dropped, a point which Glaucus, a short-selling investor, acknowledged in its report.
“The Company believes the allegations made in the [Glaucus] report to be without merit and not supported by evidence,” said Lumena Chairman Zhang Zhigang, in a statement. “The Company is seeking legal advice from its legal advisers and reserves its rights to take legal actions against Glaucus and Emerson Analytics.”
But the two reports are not the first time similar questions have been raised about Lumena.
A 2011 story in the specialized financial news service Debtwire pointed out large differences between Lumena's financials reported in Chinese tax filings to the State Administration of Industry and Commerce and figures given to the Hong Kong Stock Exchange for another company unit processing the mineral thenardite.
The company said it was based on discrepancies between preliminary electronic tax filings and official filings. That story was also published on the website of the Financial Times newspaper.
Lumena initially planned to issue its 2013 full-year financial report March 28, but after the Glaucus report came out March 25, and then the Emerson report April 1, it said it was delaying that until it responded in full to both. Its shares remain suspended from trading.
Glaucus said its 24-page report was based on reviews of publicly-available Chinese tax records, which it said show that Lumena reported only 181 million Chinese yuan ($29.1 million) of income from its PPS business in 2012, 91 percent less than it reported to the Hong Kong stock market.
“The [Chinese government] filings suggest that not only is Lumena fabricating PPS revenue, but that the Company overpaid for the RMB 10 billion ($1.6 billion) acquisition of the PPS business from the former Chairman and other shareholders in 2011,” Glaucus said.
Lumena paid for the purchase with 10 percent in cash and 90 percent in stock.
Emerson issued a 43-page report April 1 that argues, based on observations of its production plants and estimates of capacity based on information from its raw material and equipment suppliers, that Lumena's PPS resin production is about 5,000 tons, or about 18 percent of what the company claims.
Lumena, in its April 4 filing with the Hong Kong market, said the Glaucus report contained incorrect information and that its two business units making PPS reported 2.93 billion Chinese yuan ($471 million) in revenue in 2012.
It said those tax documents would be available for inspection at its Hong Kong office on working days until April 30.
“The Company wishes to point out that the financial information of Sichuan Deyang Chemical set out in the Glaucus Report was wrong and without basis,” Lumena said.
“The substantial discrepancies between the financial information contained in the Glaucus Report and the Group's actual circumstances have demonstrated that Glaucus does not even have the most basic understanding of the Group's operations,” Lumena said.
Lumena said it would respond in detail to the Emerson allegations later.
Lumena and DSM Engineering Plastics in May 2012 announced that they were in talks about jointly marketing some grades of engineering plastics and developing alloys of PPS and polyamide resin.
In May 2013, a DSM executive said at the Chinaplas trade show that the two companies remained in “intensive discussions” about a partnership. DSM did not respond to an email and telephone call about the status of those talks.
Lumena did not respond to a phone call and email.
Glaucus also noted that the credit rating agency Moody's withdrew its rating of Lumena in December, which Glaucus said could make it harder for Lumena to refinance $120 million debt due in mid-May.
Moody's said in a statement only that it ''has withdrawn the rating for its own business reasons.''
Lumena did not address the Moody's rating in its filing but said its financials were audited in accordance with the rules of the Hong Kong stock exchange.
In March, the company said in a statement that a new 25,000 metric ton PPS resin production line would begin trial production in June, boosting its total capacity to 55,000 metric tons. The company said it will add another PPS production line this year.