New Silkroutes plans independent review of deals signed with China entity

Singapore

HEALTHCARE and energy firm New Silkroutes Group will appoint an independent public accounting firm to review matters relating to two of its agreements involving a China unit, and the valuation of its stake in a Thai firm.

This comes after independent external auditor Deloitte & Touche included a disclaimer of opinion on the group's financial statements for the fiscal year ended June 30.

Deloitte said in its Oct 14 report that it was unable to obtain sufficient audit evidence on matters including the business rationale, commercial substance and structuring of two agreements that New Silkroutes' wholly-owned subsidiary Shanghai Fengwei Garment Accessory (SFGA) signed with a Chinese entity in April.

New Silkroutes disclosed that the Chinese entity is Shanghai Minlin New Textile Materials Sales Centre. Its ultimate beneficial owner, Lin Jie, is an acquaintance of New Silkroutes' executive director and substantial shareholder, Shen Yuyun.

New Silkroutes and SFGA signed a management agreement (MA) with Shanghai Minlin, which gives New Silkroutes a guaranteed profit of US$2.8 million from SFGA's operations for the year to Dec 31, 2021. Shanghai Minlin will take any excess profits or bear any excess losses.

SFGA and Shanghai Minlin also signed a management-service agreement (MSA), under which SFGA is to receive services such as human resource management, corporate image planning, production process management, marketing development and financial management from Shanghai Minlin.

In response to the Singapore Exchange's (SGX) queries, New Silkroutes said on Wednesday night that the need to ease its cash flow was a key reason for inking the MA.

The independent review will cover the commercial substance of the MA and MSA. It will also look into potential tax exposures and the impact of any non-compliance with regulatory or legal requirements from the MSA.

New Silkroutes noted that SFGA's revenue had increased by about 100 million yuan (S$20.6 million) after both the MA and MSA were inked, thanks to new orders introduced by Shanghai Minlin.

Deloitte also said it could not determine the appropriateness of the valuation methodology used for Thai General Nice Coal and Coke.

New Silkroutes holds 4.5 per cent of the Thai entity and had classified this stake as a financial asset at fair value through other comprehensive income. It recorded a fair-value loss of US$2.5 million in FY20, bringing its value to US$17.2 million.

But the Thai firm had not begun operating by end-June.

New Silkroutes said it believes the valuation is reasonable and appropriate, but that the board and the management would explore with the incoming auditors on other methods of valuation that are acceptable.

Deloitte's disclaimer of opinion was published on the same day the company announced that chairman Goh Jin Hian and finance director William Teo had quit.

Separately, Dr Goh and Mr Teo have been assisting the Commercial Affairs Department with its investigation into alleged false trading and market rigging.

New Silkroutes shares fell 0.2 Singapore cent or 2.3 per cent to end Thursday at 8.7 cents.