CHINA MILK (Lim&Tan)

The findings of the special audit review conducted by KPMG are worth a read. Among its findings are:

1. Response to majority of requests have been characterized as “obtuse and risible” and perception is of a company “not ready to be transparent” in its commercial activities.

2. Verification of cash balances simply could not be done with the refusal by bank manager to grant an interview / co-operate.

3. Purchase of cattle (at a cost of US$28.3 mln/37.2 mln in Nov ’09) that turned out to be of the similar average age as those to be replaced (5 years and not <2 years as alleged) because of diminishing returns on milk productivity.

4. Notwithstanding the replacement exercise, population of cows fell 53.5% over a 12-month period between Apr ’09 (21,747) and Mar ’10 (10,101).

5. Major capex spending (US$72.9 mln on securing land use rights and cultivation of crops like alfalfa; US$72.9 mln on Improvement Works to the farm & facilities) were not only not disclosed, the benefits are not apparent, eg buildings and facilities “cannot be said by any stretch of reason to be more than basic or at best average” after the works. They were also not even tabled for board discussion.

6. The company does not have a meaningful internal audit structure in place.

- Findings like the above do not bode well at all for the S-Chips sector.