Winsway Denies Claims in Report Over Level of Coal Imports

Jan. 20 (Bloomberg) -- Winsway Coking Coal Holdings Ltd., which processes and transports coal to China from Mongolia, denied allegations from a short seller that imports were less than the company reported and inventories were overstated.

“This report is dead wrong,” Chief Financial Officer Jerry Xie said today on a call with investors. “Winsway is absolutely not a fraud,” as was alleged in a report from Jonestown Research, he said in an earlier call yesterday after shares slid 8.6 percent.

Scrutiny of accounting standards of Chinese companies intensified last June when short seller Carson Block's Muddy Waters LLC alleged Sino-Forest Corp. overstated its assets and cash. Short sellers have targeted other Chinese companies including vegetable producer Chaoda Modern Agriculture Holdings Ltd. and software maker Longtop Financial Technologies Ltd.

“We believe the management has provided reasonable explanations to handle the fraud accusation this time,” Shirley Zhao, an analyst at Mirae Assets Securities Co. in Hong Kong, wrote in a note to clients after the second conference call. Zhao maintains a “buy” rating on the stock and a target price of HK$3.63.

Winsway fell as much as 7.9 percent to HK$1.76 today and was HK$1.81 as of 11:28 a.m. in Hong Kong, set for its lowest close since Oct. 6, according to data compiled by Bloomberg.

Winsway's $500 million, 8.5 percent bond has fallen 7.5 cents since the report was released to 76 cents on the dollar to yield 16.7 percent, according to BNP Paribas SA.

Details Withheld

Jonestown doesn't publicly disclose its contact information, InvestDOOR, the website that published the Jonestown Research report, said in an e-mailed response to Bloomberg. InvestDOOR doesn't research or analyze companies, it said.

“We do ensure that the research published is clear, well- supported and actionable,” the publisher said in the statement. There doesn't appear to be any results on a research firm named Jonestown Research using Google Inc.'s Internet search engine.

Winsway will proceed with its planned purchase of Canadian metallurgical-coal producer Grande Cache Coal Corp., Xie said. It agreed in October to buy the miner with Japan's Marubeni Corp. for C$1 billion ($987 million) to take advantage of surging demand from steel producers in China.

Target Declines

Grande Cache Coal, based in Calgary, fell 5.8 percent to C$9.35 at the close yesterday in Toronto.

“Grande Cache Coal has no reason to believe that there is any merit to the allegations,” the company said yesterday in a statement. Grande Cache Coal “has been assured by Winsway that the report is entirely without merit.”

A spokeswoman for Marubeni who declined to be named in line with company policy said she could not immediately comment on the Winsway report. Further calls to Marubeni were not answered. Winsway has yet to have official talks with Marubeni, Xie said.

Distribution of a shareholder document for the acquisition has been delayed to finalize information, Winsway said in a statement late yesterday. The document will be sent by Feb. 22, it said.

‘Red Flags'

Moody's Investors Service warned of “red flags” at 61 companies in a July report, highlighting risky or opaque business models and poor quality earnings. Winsway was given 11 flags out of a possible 20, with Moody's citing related-party transactions as the company's chairman has a majority stake in both Winsway and external commodity trading businesses.

Moody's Investors Service and Fitch Ratings Ltd. both have a stable outlook on Winsway. Moody's rates Winsway's debt “B1” and Fitch rates it “BB,” the second highest for non-investment grade debt.

Winsway's transportation company in Mongolia, Moveday, used to be part of the company and is “not legally attached” anymore after it was spun off before Winsway's initial public offering in 2010, Xie said. Moveday is an “undisclosed related party,” Jonestown said in the report.

Moveday handles half of all coal transportation in Mongolia and also provides services to other coal suppliers, Xie said today.

Carolyn Quick, a spokeswoman for TMX Group Inc., owner of the Toronto Stock Exchange, declined to comment on the issue, citing company policy not to discuss individual companies.

Winsway hasn't been contacted by Canadian regulators or Hong Kong's bourse, Xie said. Ernest Kong, a spokesman for the city's Securities and Futures Commission, declined to comment when reached today by phone.

Mixed Record

Reports alleging inaccurate reporting and fraud at companies with operations in China have had a mixed record.

Silvercorp Metals Inc., the Vancouver-based mining company that faced fraud allegations in August, said in October a forensic investigation by accounting firm KPMG LLP found the assertions in two anonymous reports were untrue. In September, the miner with operations in China sued two websites and their operators for allegedly spreading false information in an effort to drive down the company's stock price.

China vegetable supplier Chaoda, which plunged more than 80 percent last year in Hong Kong, delayed its annual earnings release on Sept. 30 to audit its accounts after a report from Anonymous Analytics questioned its finances. The shares were suspended Sept. 26.

Longtop Financial's shares plunged and were eventually delisted in the U.S. after Citron Research and OLP Global LLC alleged the company inflated profit margins by hiding expenses and underpaying employee benefits.

Short Sellers

Jonestown said in its report it's betting that shares of both Winsway and Grande Cache will decline. In short selling, investors sell borrowed shares in anticipation that the securities will decline and they can buy them back at a profit.

Winsway uses so-called intermediaries to import coal and that may account for differences in Winsway's own accounts and Chinese import data as alleged in the report, Xie said.

“The company stands by its audited inventory balances,” Winsway said in a separate statement this morning to address the allegations. Auditors KPMG LLC have studied the company's inventory, Xie said today. Jonestown's methodology to calculate its inventory is based on wrong assumptions, he said.

Winsway has four suppliers in Mongolia, including Mongolian Mining Corp. and SouthGobi Resources Ltd., Xie said. It counts China Minmetals Co. and Marubeni as its customers, he said. Ma Jun, a spokesman of China Minmetals, said he has no information about Winsway as the company has many suppliers.

There are eight “buy” ratings on Winsway, three “holds” and no “sells,” according to data compiled by Bloomberg. Winsway started trading in October 2010 after selling shares at HK$3.70 a piece, raising HK$3.66 billion ($470 million) in its IPO.

--With assistance from Kana Nishizawa and Paul Gordon in Hong Kong, Helen Yuan in Shanghai, Yuriy Humber in Tokyo and Tanya Angerer in Singapore. Editors: Rebecca Keenan, Indranil Ghosh

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