BEIJING Shares in Hongqiao Group Ltd (1378.HK) sank on Wednesday as much as 8 percent, their worst day in 18 months, and trading was halted after a research firm published a report alleging the company underreported its costs.
In a report dated Feb. 28, Emerson Analytics said Hongqiao, the world's largest aluminum producer, has hidden 21.6 billion yuan ($3.14 billion) in costs through underreporting over the years and estimated that its profitability is less than half of its claims.
The company requested a trading halt at 10:53 a.m. (2253 ET) pending the release of the company's response, according to a filing to the Hong Kong stock exchange. Shares were halted at HK$7.15 ($0.92), down just over 8 percent.
In a statement, the company said it was aware of the report and rejected the allegations as "completely without merit".
"The group is now in the process of providing full and accurate disclosure to its stakeholders and the market to address the claims that attempt to undermine confidence in China Hongqiao's business, management and reputation," it said.
Emerson said the stock is worth only 40 percent of its current price and initiated coverage of the stock with a strong sell recommendation.
"Our investigations and analysis have shown that, mainly through underreported costs and "subsidies" provided by connected parties disguised as independent third parties, China Hongqiao has fabricated the profitability that vastly exceeds those of its peers," it said.
The report is the first by Emerson published on its website since September last year when it took aim at Hua Han Health Industry Holdings Ltd (0587.HK). Trading in Hua Han's shares have been halted since Sept. 27.
Since 2014, Emerson has targeted five other Chinese listed companies, including China Fiber Optic Network System Group Ltd (3777.HK) and Sound Global (0967.HK) and Shenguan Holdings (0829.HK).
On its website, it says it is run by a group of equity analysts who are "determined to expose as much of the fraud in the Chinese stock market as we can."
($1 = 6.8783 Chinese yuan renminbi)
($1 = 7.7625 Hong Kong dollars)
(Reporting by Josephine Mason in BEIJING and Melanie Burton in MELBOURNE; Editing by Christian Schmollinger)