Naibu's disappearing-director scandal

published 24 February 2015

150224-naibu — Naibu's non-executive directors have been unable to contact the company's senior management

Over my 30-odd years as a professional investor, I've come across quite a few frauds and spectacular company failures. But this is the first time I remember top management disappearing.

Last week the non-executive directors of a Chinese sportswear-maker called Naibu(LSE:NBU) issued a very strange and disturbing announcement to the stockmarket. The directors said that they had failed to get any information regarding the company's trading operations in China. As a result, they were "unable to provide shareholders with any update on the financial position" of Naibu.

It seems the senior management based in China, including the chairman, Lin Huoyan, who owns 52% of the shares, have simply not returned the non-executive directors' calls.

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Something odd is going on.

Where it all went wrong for Naibu

Naibu has clearly been struggling.

Back in September, Naibu axed its dividend when it reported disappointing interim results. The shares took this badly, losing a third of their value.

Things got worse with another profit warning in November. This referred to weak sales of Naibu sports gear in the shops as a result, stocks had built up at their distributors. This meant prices would have to be discounted to clear the overhang. It would also result in reduced orders for new products while supply and demand got back into balance.

At least shareholders should have been able to console themselves with the apparent strength of the company's balance sheet. Although cash had declined during the first half of 2014, the half-year results showed a cash balance of 332m (about £35m) and no debt. On top of that, the net asset value of the company was over £140m.

So guess what the stock market valued the business at back in November? I'll wager you were out by a fairly wide margin the market capitalisation was a rather sceptical £10m.

Clearly, the market doesn't believe the numbers. A lot of those doubts will relate to the large receivables' item in the accounts. Naibu was owed around £105m by its customers a huge number, which was 25% higher than the level six months before. Given those comments about the overhang of unsold products with distributors, it looks like we're in line for an enormous write-off.

That's why the non-executive directors have been trying to find out the true state of affairs. They wouldn't have been helped by the resignation of the finance director never a good sign at the end of December.

In early January, they requested a suspension in the trading of Naibu's shares, "pending clarification of its trading position". Which then leads us to last week's update that they can't find out what's been going on.

To try and help, they've appointed KPMG, one of the big four global accounting firms, to investigate. But the chairman, Mr Lin, has characteristically "not indicated" whether he will co-operate with KPMG.

If you don't own Naibu shares, this could all be quite entertaining. If you do own them, possibly tempted by them seeming to be such a bargain, you have my commiserations.

But as always with investment disasters, there are important lessons to be learned.

Pay closer attention to overseas stocks

An obvious lesson is my old favourite: if something looks too good to be true, it probably is. In this case, a profitable company trading at a big discount to its assets, and even to its cash balance.

Another lesson might be that the Alternative Investment Market (Aim) has been called a casino' by some, and that Naibu is a prime example of lax regulation. So we should give Aim a wide berth.

Now, I agree that the regulators of Aim need to raise their game. But I don't think avoiding Aim completely is a sensible response.

After all, a couple of the biggest corporate frauds in my experience happened with FTSE 100 stocks. Their chairmen didn't go incommunicado like Naibu's. Instead, Robert Maxwell of Maxwell Communications jumped off his yacht, while Asil Nadir of Polly Peck flew to Northern Cyprus where he couldn't be extradited.

A good tip would be to look at overseas stocks which list on Aim even more closely than you would a domestic company for whom Aim is the local market. After all, we can't visit a Naibu store or be able to verify that Naibu really is a major brand in China, without jetting off halfway round the world.

So we have to rely on other signals to give us confidence that a Chinese Aim stock is on the level. If it's harder for us investors to do our "due diligence", then we need to rely on others for whom getting it right really matters. Reputations are important they take a long time to build up and can be lost in a few moments. So advisers and non-executive directors who lend their names, brands and reputations to a company need to make sure it's kosher.

The three non-execs at Naibu have at least taken a lead in requesting the trading suspension, appointing KPMG and trying to get to the bottom of what's happening. However, this is a bit late in the day. They all have a background in the Far East, which should have been reassuring but it doesn't seem to have helped them avoid a major embarrassment with Naibu.

All Aim companies have a nomad' nominated adviser. They act as corporate finance adviser and work with the board in ensuring the company complies with the rules and regulations of Aim. So a good quality nomad is a source of comfort for investors. Naibu's original adviser had to relinquish its licence last year, having hit financial difficulties.

The message is to look critically at these advisers and non-execs whose job is to protect our interests as shareholders. Ask whether they have a valuable reputation that they don't want to risk in a dodgy Chinese stock.