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Hengan responds to short-seller report, resumes trading

Hengan International Group Co. Ltd. resumed trading Dec. 13 as it responded to fraudulent reporting allegations made by short-selling firm Bonitas Research.

Hengan, which produces sanitary napkins and baby diapers, was the subject of a 38-page report by the Texas-based firm in which it claimed Hengan fabricated 11 billion Chinese yuan in net income since 2005.

In a filing to the Hong Kong Stock Exchange, Hengan said the accusations are "malicious" and "completely speculative and baseless."

In response to the firm's claim that Hengan fabricated its net income, the company said it has benefited from its early entry into the business of sanitary napkins since 1985, adding that it has regularly obtained market research reports from industry experts to verify its market share in China.

Hengan also refuted Bonitas' claim that the retailer overstated its reported sanitary napkin operating profit margins in its stock exchange filings. Hengan said different profit margin exists because of the group's structure in China, which includes Hengan (China) Investment Co. Ltd. and two other subsidiaries engaged in the sanitary napkin business, Fujian Hengan Holding Co. Ltd. and Fujian Hengan Homecare Products Co. Ltd.

In addition, the company denied claims that it used a "web of inter-company related transactions" to inflate profits and hide fake cash balances. Hengan said it has subsidiaries in Hong Kong, Macau and China that are not subsidiaries of Hengan China. The group uses these subsidiaries to purchase raw materials and for production. These subsidiaries transact with other subsidiaries of the group, including subsidiaries of Hengan China, in "genuine transactions," Hengan said.

Bonitas also claimed that Hengan insiders used the group's cash investments in Fujian Xiamen Hengan International Plaza to fund the private family business of Hengan's CEO Lin-Chit Hui. In response, Hengan dismissed the allegation, saying the 700 million yuan spent on the development of the property consisted of amounts spent for land purchase acquired directly from the Chinese government.

"The company believes that Bonitas' ultimate aims are to drive down the price of the shares of the company, undermine the company's reputation and take advantage of any fluctuation in the share price of the company," Hengan said.

The company added that it has no information on the identity of Bonitas.

Hengan's shares dropped 5.00% to HK$54.20 as of 11:54 a.m. Hong Kong time.

As of Dec. 12, US$1 was equivalent to 6.88 Chinese yuan.