Further pain in the S-Chip sector; China Hongxing and Hongwei both suspended

Both Hongwei and China Hongxing are set to be suspended, following audit issues "regarding issues pertaining to the cash and bank balances confirmation" for Hongwei and "irregularities in the cash and bank balances, accounts receivables, accounts payables, and other expenses during the course of their audits of its subsidiary companies in the People’s Republic of China (“PRC”)" in the case of China Hongxing. Ernst & Young are the auditors in both cases.

We have highlighted our concerns over S-Chips in the past (see http://sgvalue.blogspot.com/2010/09/looking-at-cash-balances-of-s-chips.html and http://sgvalue.blogspot.com/2010/06/s-chipped-reprise-2010.html) and the latest audit problems in the case of Hongwei and China Hongxing serve to showcase that S-Chip companies are indeed poor quality companies which cannot be assessed based on balance sheet strength alone. We do not own any S-Chips and will continue to adopt a sceptical approach towards the sector, which is fraught with fraud (pun not intended).