How dairy firm`s dreams of empire turned sour

A2 Hong Kong & Delta
FRIDAY, APRIL 30, 2010 SOUTH CHINA MORNING POST
Poles apart
Taizinai declared net assets in 2008 of
749m yuan
-783m yuan
245.2m yuan
30m yuan
How dairy firm’s dreams of empire turned sour
Deloitte, though, said the figure was
Taizinai’s stated net profit in 2007
Deloitte, though, estimated a net loss of
Hunan Taizinai’s factory in Zhuzhou (left) and company founder Li Tuchun seen at an
event with Hong Kong celebrities (from left) Nicholas Tse Ting-fung and Twins singers
Gillian Chung Yan-tung and Charlene Choi Cheuk-yin
• CONTINUED FROM A1
layers of warm clothing and a woollen overcoat and used portable gas
heaters to insulate himself from the
harsh Hunan weather.
But while the entrepreneur views
himself as still running Taizinai, it is
possible the business started to suffer
when he was handed vast sums of
foreign money.
In 2007 after winning financial
support from his private equity backers, Li borrowed a further 468 million
yuan from a banking syndicate led by
Citi and another 149 million yuan
from Dutch bank ABN Amro – now
subsumed into Britain’s RBS. Then Li
borrowed cash from mainland
banks, taking Taizinai’s total loans to
1.314 billion yuan by August 2008.
Benjamin Cheng, a Beijing partner with Actis, sat on Taizinai’s board
and was meant to be able to approve
major purchases.
Someone familiar with this situation said: “The jade, the marble, and
quite a few of the mainland bank
loans were not put to or signed off by
the board.” It is possible the heavy
spending was justified in the light of
potential returns in the future. The
entrepreneur attracted private equity
cash and loans from international
banks because he was planning to
launch his company on either the
Hong Kong or New York stock markets.
An initial public offering reportedly would have valued Taizinai at
US$800 million. It would have turned
Actis, Goldman and Morgan Stanley’s US$73 million investment for a
31per cent stake into US$248 million.
Actis committed US$40 million to
Taizinai. Goldman and Morgan Stanley invested US$15 million and US$18
million respectively. Morgan Stanley
also advised the company on the potential transaction, so would have
scored deal fees on top of its profits.
All declined to comment.
The investors apparently carried
out due diligence on Li and Taizinai
for five months before signing the
deal. They saw no red flags.
Li had only known success until
his expansion drive.
After giving up his iron rice bowl of
state enterprise employment in 1990,
Li set up book shops, restaurants and
video stores in Shenzhen. By 1993, Li
had built up a 1 million yuan fortune,
according to the Deloitte report.
The entrepreneur set up Taizinai
in 1996, operating from a single milk
factory in Zhuzhou.
In 1997, he took the forward-looking step of spending 89 million yuan
advertising Taizinai’s health drinks
on CCTV. The campaign won the
firm 800 million yuan worth of orders
that year, the Deloitte report said.
Taizinai had a 61 per cent share of
its niche market on the mainland by
2003.
order to attract outside investors and
creditors,” Deloitte wrote in the December 2008 document.
The accountants also found Taizinai had purchased 240 cars for management use. They said the maximum number of vehicles Li and his
executives could ever need was 40.
Deloitte said many of the management team, moreover, were
“idle”. They said these people, identified as members of Li’s family and
government officials, were “living off
the company”.
Li did not incur such expenses in
2006, before Actis, Goldman and
Morgan Stanley pumped cash into
Taizinai, someone who negotiated
the private equity investment said.
But from January 2007 to August
2008, Deloitte calculated Li spent 60
million yuan on “extraordinary personnel expenses”.
During that time the company
spent a further 17 million yuan on
what Deloitte identified as “gifts” for
its customers and product distributors.
By the end of 2008, Deloitte said,
Taizinai had virtually ceased production, having encountered a perfect
storm of bad luck alongside its overexpansion.
Much of the company’s distribution was in central and west China.
Sales suffered heavily from the May
2008 Sichuan earthquake.
A few months later, the mainland
In 2006, Taizinai reported sales of
1.3 billion yuan and a healthy 210 million yuan net profit, according to Deloitte. In its accounts for August 2008,
Taizinai said it had 749 million yuan
worth of net assets – the value of its
buildings, money owed by customers and cash in the bank.
Deloitte said it suspected Taizinai
had recorded 200 million yuan of
“fictitious sales”. The accountants
added that another 682 million yuan
of Taizinai’s assets was a “doubtful”
valuation the company had placed
on its ongoing construction projects.
Conservatively, the accountants
estimated Taizinai’s net assets at minus 783 million yuan. In other words,
the value of what the company owed
was much bigger than what it owned.
“After Deloitte’s proposed adjustments the overall financial position
of Taizinai Group becomes insolvent,” the accountants wrote.
In its 2007 annual report, the yoghurt maker recorded a net profit of
245.2 million yuan. Deloitte, following its due diligence, said Taizanai
had in fact suffered a 30 million yuan
net loss that year.
The report’s authors, Deloitte’s
Edmund Yeung and Ming Xie, asked
Taizinai’s management why the accounts were overstated. They recorded this reply, while diplomatically declining to identify who said it. “As advised by management, this large positive net asset has been overstated in
The jade, the marble,
and quite a few of the
mainland bank loans
were not signed off
by the board
......................................................
An insider
As advised by
management, this
large positive net
asset has been
overstated in order
to attract investors
and creditors
......................................................
Deloitte’s 2008 report
Weather
HONG KONG
FORECAST
19 22
21 24
Today
cloudy with occasional rain. a few squally
thunderstorms at first.
N
WIND
HUMIDITY
UV INDEX
POLLUTION
Force 4 To 5
80-95%
2
Medium to High
Cloudy with rain. Rain will be more frequent at first.
Temperatures will range between 18 and 22 degrees.
Fresh easterly winds, occasionally strong over offshore
and on high ground at first. Mainly cloudy with a few
rain patches in the following couple of days.
GENERAL SITUATION (11PM YESTERDAY)
A fresh to strong easterly airstream affected the
South China coastal areas. Meanwhile, a broad
band of clouds brought thundery showers to the
region. Locally, there was rain and a few squally
thunderstorms during the day. More than 50
millimetres of rain was recorded over parts of the
New Territories and Lantau Island. The easterly
airstream is expected to be replaced by a humid
maritime airstream early next week.
Tomorrow
mainly cloudy with a few
rain patches.
Sunday
a few rain patches at first.
sunny intervals during the
21 25 day.
ASIA TODAY
Dalian
Guilin
Guiyang
Hefei
Jinan
Lanzhou
Nanchang
Nanjing
Nanning
Shijiazhuang
Taiyuan
Urumqi
Wenzhou
Xiamen
Xining
Yinchuan
Zhengzhou
7
19
14
14
9
11
16
11
21
8
5
15
13
17
2
6
10
16
27
22
25
23
26
27
24
28
25
23
24
22
25
21
24
24
ASIA-PACIFIC
Harbin 1 15
Hohhot 2 18
Shenyang 3 16
Tokyo 11 20
Beijing 8 23
Seoul 6 14
Qingdao 9 18
Xian 13 26
Shanghai 14 25
Wuhan 16 27
Changsha 17 28
Kunming 11 24
Calcutta 26 37
Kaohsiung 22 23
MAX
85
110
POLLUTION YESTERDAY
Hong Kong 19 22
API LEVEL
MIN
MAX
Central/Western
Eastern
Kwai Chung
Kwun Tong
Sha Tin
Sham Shui Po
Tai Po
Tap Mun
Tsuen Wan
Tung Chung
Yuen Long
High
High
High
High
High
High
High
Medium
High
High
High
65
59
68
65
57
72
52
38
67
54
64
90
82
99
89
78
92
63
59
87
89
93
API LEVEL
MIN
MAX
Very High
Very High
Very High
99
124
109
134
156
125
WWW.EPD.GOV.HK
PEARL RIVER DELTA REGIONAL AIR Q
QUALITY MAP
GUANGZHOU
Haikou 24 29
Vientiane 23 36
Yangon 27 40
Chennai 28 35
GENERAL STATIONS
Manila 27 33
Bangkok 26 34
Phnom Penh 24 34
Ho Chi Minh City 27 36
Phuket 27 31
Kuala Lumpur 24 33
Singapore 25 33
HONG KONG
Pollutant concentrations are well within the air quality standards.
Pollutant concentrations are generally within the air quality standards.
Concentrations of individual pollutants may approach or exceed the air quality standards.
Air quality standards are generally exceeded.
Air quality standards are significantly exceeded.
TIDES
Low
High
Low
MOON & SUN
1.0m 03:30
2.3m 09:57
0.4m 16:51
Moonrise
Moonset
Sunrise
Sunset
20:46
06:50
05:52
18:49
MIN
MAX
fine
few showers
thunder
fine
showers
fine
fine
thunder
few showers
mainly fine
fine
mainly fine
showers
fine
few showers
thunder
fine
fine
mainly fine
mainly fine
fine
few showers
few showers
showers
10
8
22
15
25
10
0
25
25
28
26
26
9
22
22
26
25
28
14
26
13
15
13
16
22
20
32
26
34
16
19
32
33
43
34
34
18
28
36
34
37
29
21
35
24
22
28
19
showers
fine
mainly fine
fine
few showers
rain
fine
rain
rain
rain
showers
few showers
fine
cloudy
few showers
few showers
cloudy
cloudy
rain
cloudy
rain
mainly fine
fine
cloudy
fine
showers
11
13
14
10
15
11
10
9
5
15
11
3
7
14
10
11
13
4
14
4
11
12
10
9
11
11
15
23
21
27
22
16
25
16
13
20
19
12
19
19
15
25
25
17
22
17
18
25
21
14
26
21
cloudy
cloudy
mainly fine
few showers
cloudy
fine
cloudy
mainly fine
cloudy
mainly fine
fine
cloudy
cloudy
few showers
28
12
25
16
18
12
18
27
30
26
11
27
28
15
41
21
34
23
27
24
22
39
39
38
20
36
39
24
fine
few showers
mainly fine
few showers
fine
fine
fine
mainly fine
thunder
mainly fine
thunder
fine
cloudy
fine
fine
rain
mainly fine
cloudy
cloudy
showers
fine
fine
cloudy
cloudy
few showers
mainly fine
13
10
8
17
10
-1
26
11
22
12
24
10
18
10
9
24
3
9
1
19
9
5
6
5
7
9
29
21
23
29
23
10
32
24
33
27
28
21
24
20
29
27
21
30
22
22
16
25
13
20
15
31
MIDDLE EAST & AFRICA
SUNNY
FOG
ISOLATED
SHOWERS
SHOWER
ISOLATED
THUNDER
DUST
SNOW
FLURRIES
HAIL
PARTLY
CLOUDY
CLOUDY /
OVERCAST
DRIZZLE
RAIN
THUNDER
WINDY
SNOW
TYPHOON
ISOBAR CHART
YESTERDAY'S READINGS
TEMPERATURES
Chek Lap Kok
Cheung Chau
Hong Kong Park
King's Park
Lau Fau Shan
Sai Kung
Sha Tin
Ta Kwu Ling
Wong Chuk Hang
MIN
FRONTS
MAX
18.6 26.3
17.2 22.8
18.1 25.6
17.8 25.0
17.9 25.6
18.2 24.0
18.7 25.9
17.8 25.8
18.4 24.6
COLD
Air Temperature
Grass
Humidity (%)
Sunshine (Hours)
Rainfall (mm)
WARM
1018
OCCLUDED
1014
18.1
18.6
80
STATIONARY
24.2
TROUGH
99
0.4
45.1
Total rainfall since January 1st is 238.0 mm
against an average of 325.6 mm.
AS AT 2PM
YESTERDAY
1010
DATA SOURCE
SMGM Hong Kong Observatory
EPD www.epd.gov.hk
Abu Dhabi
Amman
Bahrain
Beirut
Cairo
Cape Town
Casablanca
Doha
Dubai
Jeddah
Johannesburg
Kuwait
Riyadh
Tel Aviv
THE AMERICAS
HONG KONG OBSERVATORY
I
II
III
IV
V
Amsterdam
Athens
Barcelona
Belgrade
Berlin
Brussels
Budapest
Copenhagen
Dublin
Frankfurt
Geneva
Helsinki
Istanbul
Lisbon
London
Madrid
Milan
Moscow
Munich
Oslo
Paris
Prague
Rome
Stockholm
Vienna
Zurich
Taipei 18 27
Guangzhou 19
Adelaide
Auckland
Bangalore
Brisbane
Brunei
Busan (Pusan)
Canberra
Colombo
Darwin
Delhi
Denpasar
Dhaka
Hobart
Honolulu
Islamabad
Jakarta
Karachi
Male/Maldives
Melbourne
Mumbai
Perth
Sydney
Tashkent
Wellington
EUROPE
Naha 19 25
Fuzhou 16 25
Hanoi 20 30
MIN
API = AIR POLLUTION INDEX
Hiroshima 7 13
Hangzhou 14 27
50
80
Causeway Bay
Central/Western
Mong Kok
Osaka 10 19
Tianjin 8 23
Chongqing 20 29
Kathmandu 13 32
API LEVEL
ROADSIDE STATIONS
Sapporo 6 11
Changchun 3 14
Chengdu 17 26
Lhasa 5 19
General Station
Medium to High
Roadside Station High to Very High
233 227
7
Tuesday
mainly cloudy with a few
showers.
THE WORLD TODAY
Fine
Cloudy
Overcast
Fine
Fine
Fine
Cloudy
Fine
Cloudy
Fine
Fine
Showers
Showers
Cloudy
Fine
Fine
Fine
POLLUTION TODAY'S FORECAST
FORECAST
22 26
Monday
sunny intervals. misty in the
morning.
Other cities visit: www.scmp.com
Information visit: www.metra.info
Atlanta
Bogota
Boston
Brasilia
Buenos Aires
Calgary
Caracas
Chicago
Dallas
Detroit
Houston
Las Vegas
Lima
Los Angeles
Mexico City
Miami
Montreal
New York
Ottawa
Rio De Janeiro
San Francisco
Santiago
Seattle
Toronto
Vancouver
Washington DC
dairy industry was rocked by the melamine scandal, when several companies laced their products with the
harmful chemical. Around 300,000
babies were injured.
Taizinai did not sell any adulterated milk products, but the scandal
resulted in the central government
ordering banks not to extend loans to
the dairy sector.
According to two people who remain close to Taizinai, the Zhuzhou
government has stabilised the
business.
In October last year, Li asked the
Zhuzhou government to give him
back control of his company,
Taizinai’s provisional liquidators
Borrelli Walsh said in an April 12
mailout to the yoghurt company’s
bank creditors. The local politicians
told Li it was “unlikely” they would
return management of the business
to him. Borrelli Walsh declined to
comment.
“By last autumn, the company
had moved close to the levels of production it was achieving in 2006,” one
of the people said.
But this does not mean Li’s
sprawling factory empire will operate
at full capacity any time soon.
Last year, Actis, Goldman and
Morgan Stanley worked extremely
hard with the Zhuzhou government
to find a new buyer for Taizinai.
The blue chip organisations encouraged big names including Nestle
SCMP GRAPHIC
to view the business. They remain
hopeful it can be sold. A sale would
also be the best solution for Taizinai’s
international bank lenders, including
Citi and RBS.
Because the yoghurt company’s
shareholders and international
banks, led by Citi, lent to Taizinai’s
holding company in the Cayman
Islands, their legal rights are somewhat unclear. The creditors can only
use the Caymans order as a tool to
take over and restructure Taizinai if
Borrelli Walsh gets the co-operation
of the local government. The Cayman Islands court has no jurisdiction
on the mainland.
Zhuzhou officials may decide
they would rather carry on running
Taizinai. They may fear a sale of the
yoghurt company to an international
buyer would threaten local jobs.
“They have written it off,” a person familiar with the yoghurt company’s private equity shareholders
says of their attitude to their investment. “They continue observing
what is happening, but they feel getting their money back would be an
unlikely event.”
A person who worked for one of
the banks that lent Taizinai cash said:
“It had all the hallmarks of a great
deal and Li seemed brilliant. He was
the executive everyone wanted to
know.”
......................................................
Additional reporting by Toh Han Shih
New system to
assess disabled
on wages floor
......................................................
Martin Wong
Disabled workers’ productivity –
which affects how much their pay is
to be discounted from the minimum
wage – should not be assessed only at
the start of their careers, lawmakers
and an advocacy group for people
with disabilities say.
Deputy labour commissioner
Alan Wong Kwok-lun told legislators
yesterday a mechanism would be set
up to test the productivity of such
workers in the workplace and a minimum wage rate would be calculated
for them.
“We hope it can encourage employers to hire people with disabilities,” Wong said. The unemployment rate for disabled people is three
times the overall jobless rate, making
it difficult for them to find jobs.
Under the new system, a test
would be conducted during a trial
period of employment, which must
not exceed four weeks.
Workers and employers must
both consent before the assessment
is done.
Wong said the purpose of the assessment was to determine the degree, if any, to which the productivity
of disabled people in performing the
work required under the contract of
employment was affected by their
disabilities.
He said the assessment must be
made by an approved assessor at a
time agreed by the workers and the
employer, whether within the trial
period of employment or after the expiry of that period.
In countries such as the United
States and Australia, similar productivity assessments of disabled workers are done to provide a reduction to
the statutory minimum wage.
Lawmakers expressed concern
that such assessments might discriminate against people with disabilities. Peter Cheung Kwok-che, a
legislator from the social welfare sector, feared that disabled workers
would be forced to undergo the assessment instead of having a choice
in the matter.
“And the assessment should not
be conducted only once – then a
worker’s discounted wage would be
decided forever,” Cheung said.
Rehabilitation Alliance Hong
Kong chairman Cheung Kin-fai said
the assessment should be carried out
Disability discount
Wages will be reduced if
a worker’s disabilities
affect productivity
......................................................
Number of times by which the
unemployment rate for the disabled is
higher than the overall jobless rate
3
. .....................................................
again after a worker had done his or
her job for a while.
“A worker’s productivity may increase as he or she gets familiar with
the job. Also, the productivity of a disabled person can be enhanced a lot
with advances in technology,” he
said.
The government stressed that the
assessment was meant for people
with severe disabilities. No test need
be done in the cases of the less disabled, if both parties agreed.
Get briefed ...
SUBSCRIBE TO BUSINESS
ALERTS VIA SMS
Top 3 stories per day, Monday to Friday
Alerts are provided in English and cost HK$1 per SMS. To access full stories
from an alert, you must have a GPRS, 3G or Wi-fi enabled mobile-phone.
Additional carrier or data charges may apply. To de-activate, text SCMP
STOP HK, SCMP STOP CN, SCMP STOP BZ or SCMP STOP ALL to 508506.
For customer service, please call 2680 8822
HK$1 per SMS alert. Text SCMP BZ to 508506