Doubts on receivable and cash balance. After a two-day halt, Fibrechem announced that the group has encountered some difficulties with its auditor, Deloitte & Touche, in relation to the finalization of the audit of its trade receivable and cash balance as of end 2008. The group has therefore delayed the release of its FY08 results, which was supposed to be due on 23 Feb.

Resignation of Executive Chairman & CEO. Fibrechem also announced that Mr James Zhang, the Executive Chairman as well as CEO of Fibrechem has resigned from his positions with immediate effect. Mr Xu Xu Hui, the Executive Vice Chairman has been appointed as the acting CEO to take over Mr James’ role in running the daily operations.

Appoint an independent investigator and finance advisor, nTan Corporate Advisory Pte Ltd to carry out investigation into transactions in question (which no further details were revealed in the announcement) and to advise on the appropriate measures to be adopted by Fibrechem to safeguard its assets and continue its operations. In addition, the board has formed an Independent Working Committee comprising Mr Ong Tiong Seng, Dr Chong Weng Chiew, Mr Lin Chin Tong and Ms Tan Sin Mui.

Dampen sentiment on S-shares. There are no details provided, as to explanation for auditor's disagreement on the balance sheet figures and reasons for James’s resignation. But, Fibrechem’s balance sheet issue would trigger off investors' fears over credibility and corporate governance of SGX-listed Chinese companies again. The hardest hit S-chips following Fibrechem’s two-day trading halt were China Hongxing (-24%) and Celestial (-27%). We believe this incident will continue to exert some downward pressure on S-chips in the near term.

No prior warning signs based on 9M08 accounts. Fibrechem’s cash position seems reasonable as of Sept 2008, with net cash increasing 32%, from HKD412m as of end 2007 to HKD544m. The Group churned net profit of HKD400m in 9M08, of which: (1) about HK80m was tied up for higher working capital requirement as cash conversion cycle lengthened from 41days to 48 days, within the historical range of 32 – 57 days in 2004 – 2007. The group’s receivable days lengthened by 6 days to 51 days over the same period, within the 40 - 70 days historical range in the past 4 years; and (2) a capex of HKD200m spent for expansion. Including the HKD200m deposit paid for the purchase of new equipment, total capex amounted to HKD400m, whichfalls in its historical range of HKD200m - HKD500m in the past 4 years.

Suspend rating on Fibrechem. The trading of Fibrechem's shares will remain suspended till further notice. We are suspending rating on the counter pending further clarification on this matter.