China Paper @ 26.5 cts

List in July 2004 at an IPO price of 36.5cts. The highest price was hit on its debut of 43 cts and eversince it has been drifting downwards.

China Paper was established in Shandong in Linyi City selling papers for for mainly3 main type of uses: 1. general print and writing, 2. packing papers used for wrapping and 3. Semin finished toliet papers in the China Market. It also sells paper chemical products although it consumes 70% internally.

At the time of writing this post, I was very tempted to increase my stakes in this company due to attractive valuation. However, on 21 Sep 2005, the company announced the resignation of its auditors, Ernst & Young Hongkong and appointment of a never-heard-of auditor, HLB Hodgson Impey Cheng.

Although as usual, the out-going auditor confirmed that there is no unusual circumstances that need to be brought to the attention to the members of the company, this is a major shake in my confidence in the company. China companies are generally preceived to be less developed in terms of corporate governance (no doubt they need to compile with the SGX listing requirements) and lack of transparencies. Hence, having a reputable external auditor would definitely mitigate the risk of any hanky-panky going-ons in the company. And as a listed client, which generally sought after by audit firms, I do not believe any major auditor firms would resign without a proper reasonale behind it. According to one source, the disagreement on audit fees was quoted as the reason by the management, but I have my doubts as I feel that as long as it is negotiated on a reasonable terms and good faith, the company and the auditors should be able to find a charge acceptable to both parties. Immediately after the news release, the market reacted by falling to a low of 25 cts the next trading day.

My principal on investment, if don't feel comfortable, do not buy no matter at what price (unless the comfortabilty - price level reach a level which I can accept).

For now, since there is uncertainity for me on the corporate integrity, I guess I would just hold my 5 lots bought at 29.5 cts while watching over the next 3 to 4 quarters to assertain if any unusual things are going on at the company. No more activities on this counter at this moment, but hope for continued dividend at the year end.