By Li Panpan

Chinese listed IC equipment manufacturer Kinglai Group (新莱应材) issued earlier this month a public notice that its three executives were under official investigation on suspicion of insider trading. They have been reducing their shareholdings in the company at skyrocketing prices during the last three years, while the company completed a premium acquisition of a packaging company in 2018. These are the revelations that led to the investigation and consequent stock plumage of the company, according to a JW Insights investigation report.  

Kinglai Group is a manufacturer of advanced semiconductor gas piping system materials. It was founded in the Taiwan region in 1991, and it moved its headquarters to Kunshan in eastern China’s Jiangsu Province in 2000. It was listed on Shenzhen Stock Exchange in September 2011. 

On April 5th, Kinglai Group informed the public that its chairman, deputy general manager Li Shuibo, secretary of the board of directors Guo Hongfei and Zhu Mengyong were being investigated for insider trading by the China Securities Regulatory Commission. Its stock price plummeted after that, hurting its 130,000 investors. 

Kinglai Group’s stock price has risen by more than 440% in the past three years, more than 180% last year. But its directors, supervisors, and senior executives continue to reduce their shareholdings.

The company’s revenue has increased from RMB490 million ($76.97) in 2016 to RMB2.054 billion ($322.66) in 2021, but its net profit rate in 2021 is only 8.32% at RMB171 million ($26.86 million), decreased to almost half of that in 2011 at 16.43%. 

Its expenses also jumped from 2016 to 2021, with enormous sales and other expenses. What’s more, the salary of chairman Li Shuibo had almost tripled from 2016 to 2020; the salaries of deputy general manager Li Shanhong and director Li Shanjun had soared nearly six times from 2018 to 2020, and they played a critical role in Li Shuibo’s cashing out the listed company’s assets.

They are in actual control of a company called GsPac with aseptic packaging businesses. In 2018, Kinglai Group acquired 100% equity in the company for RMB260 million ($40.84 million). After the transaction, they became the deputy general manager and director of Kinglai Group, respectively.

The subsidiary’s net profits have accounted for half of the parent company from 2018 to 2020, at the highest of RMB50.8213 million ($7.98 million). It seems that the acquisition is very cost-effective for Kinglai Group. However, the premium acquisition costs far exceed its performance contribution. Therefore, it might be a means for Li Shuibo to move the assets of the group and one of the reasons that he was investigated.

Between late last July and early August 2021, the Shenzhen Stock Exchange sent a letter to Kinglai Group, expressing concern about the company’s abnormal state. During this period, many of its executives are still reducing their holdings. 

JW Insights has also tracked developments in Kinglai Group and noticed its unusual situation as early as the beginning of this year. Its analysts asked to visit the company at its shareholder’s meeting on January 22 to find out more but were declined. 

JW Insights will continue to follow this case as a professional ICT consulting service in China.