GOME chairman admits: we lied
22nd November 2010 (updated)

The story so far

Back in September, we wrote about the battle for control of GOME Electrical Appliances Holding Limited (GOME, 0493). Shareholders voted the way we recommended, and the result was that:

• Wong Kwong Yu (Mr Wong, a.k.a. Huang Guangyu, f.k.a. Wong Chun Kit) was unsuccessful (48:52) in replacing the Chairman Chen Xiao (Mr Chen) and an executive director with his lawyer Mr Zou Xiao Chun (Mr Zou) and his sister Ms Huang Yan Hong (Ms Huang);
• GOME was successful (55:45) in re-electing the directors nominated by Bain; and
• Mr Wong was successful (55:45) in revoking the general mandate to issue shares without first offering them to existing shareholders

Prior to the meeting, Bain converted its bonds into shares and now holds 9.98% of GOME (not 11.06% - it used the wrong denominator in its filing).

With a vote that close, clearly the matter was not over, and there was a peace to be found. Otherwise, Mr Wong could have continued requisitioning SGMs in the hope of getting lucky. Plus, it makes sense for GOME to sit down with Mr Wong's representatives and negotiate an injection of the remaining stores operated by Mr Wong's private business into GOME, at a price which other shareholders, including Bain, can support. That part has not yet happened, but on 10-Nov-2010, GOME announced a truce in which Mr Zou will be appointed as an ED and Ms Huang as a NED. First they have to enlarge the maximum number of directors from 11 to 13, but that should be a formality at the SGM on 17-Dec-2010.

Mr Chen's confession

Now, word reaches us from Beijing of an altogether more serious matter, in the form of a research report by Matthew Forney's Fathom China Ltd, for GaveKal Dragonomics. As we said in our article of 7-Sep-2010:

On 10-Dec-2008... GOME reported that "the business, operations and relationship with its suppliers has remained normal". That's interesting, because the GOME management now claims in the SGM circular that there was a "sudden withdrawal of credit facilities" and an "acceleration of payment demands by suppliers" which "occurred following the arrest and conviction of Mr. Wong"... Similarly, in two letters to shareholders published in newspapers on 26-Aug-2010 and 30-Aug-2010, letters which GOME has failed to file with HKEx, it states that following Mr Wong's arrest, "relations with banks and suppliers were strained almost to breaking."

In the Fathom China profile on GOME, the researcher asked the Chairman, Mr Chen, about these conflicting statements. The report quotes him as saying:

"In fact, the impact was big. I think anybody in that situation would have said the same thing. If we’d said what was really happening, it would have caused a bigger panic… But we weren’t directing those comments to our shareholders. They were directed more to our partners, like brands and suppliers. There was absolutely a problem, but if you go out and say there’s a problem, then everybody would be worried."

There you go. Mr Chen admits that GOME lied when it told investors, in an announcement filed with the regulators, that the business, operations and relationship with its suppliers had remained normal. Mr Chen was CEO and acting Chairman at the time of the announcement, and says that he knew it was a lie. It is absolutely unacceptable for listed companies to lie in public statements, and it is an offence under Section 298 of the Securities and Futures Ordinance, punishable on indictment by a fine of up to $10m and 10 years in jail. A subsequent claim that investors were not supposed to read those statements is no defence. Webb-site calls on the SFC to investigate.

Mr Chen wasn't the only member of the board and management who knew how bad things were from November 2008 onwards. A video prepared during the shareholder battle last August says it all:

While on the subject of false and misleading statements about a company's condition, isn't it about time we saw some charges in the CITIC Pacific case?

Update, late on 22-Nov-2010:

Tong Zhao, a director of GOME's public relations firm Brunswick Group Ltd, writes "here are the official lines we'll use for media, for your information":

Responding to comments on Webb-site, referring to a Fathom China report on GOME, a GOME spokesperson said:
“In what we believed to be a casual conversation with someone who was writing a report on the company and industry, we talked broadly and informally about a period two years ago. There is no contradiction in fact between our public statements on this matter which we stand by.

On December 10th 2008, a few weeks after Mr. Wong’s arrest, the company correctly stated that business and supplier relationships remained normal [emphasis added]. In letters in August 2010 we did indeed talk about the credit crunch that came from the sudden withdrawal of credit facilities.

This is explained in our presentation to investors also of August 2010, where GOME highlighted the steep fall in net credit available. This is reflected in public filings at year end 08 and H1 09, showing decline from a ‘normal’ level of 3,646 million RMB at Q4 2008 to 2,033 million at Q2 2009.

Mr. Chen in no way meant to imply that what we said on December 10 2008 was inaccurate, and point of fact it was not.”

The company's claim tonight that everything was normal on 10-Dec-2008, weeks after Mr Wong was arrested, is unfortunately contradicted by the company's own statements, made in the video shown above. Sometimes, when you are in a hole, it is best to stop digging.

The English subtitles make the situation in November and December 2008, including the date of the announcement, very clear:

Chen Xiao, Chairman:

"At the end of 2008, when Mr Wong’s incident took place and he was detained by the Chinese government our company was severely affected. The incident put the company under tremendous pressure."

Wang Junzhou, President:

"The company’s immediate liquidity shortage as many banks stopped providing or reduced loans to GOME.""

Fang Wei, Director of Finance:

"Most of the banks that had been cooperating with us immediately stopped extending credit lines to us. We originally had a credit line of about 6 billion but within a week, it shrank down to 1 billion. Our cash position at the time was only about 3 billion. We were facing an estimated 5 billion capital shortage. Funds were very tight."

Mu Guixian, Vice President:

"The company’s crisis came as a big shock to our suppliers. They became uneasy and panicky. They were cautious when supplying to GOME."

Sun Yiding, Vice President:

"The problems exploded in November 2008 causing great deal of difficulties to the company against the macro environment. The founder’s incident caused instability with our relationships with suppliers, banks and our employees. The series of events no doubt caused immense difficulties to us."