Nuohui Health short seller: reported Deloitte to the Hong Kong Independent Commission Against Corruption

On the evening of April 8, the suspended Nuohui Health (06606. HK) has provided several updates on the postponement of the publication of its annual report: the appointment of two new independent non-executive directors, the establishment of an independent special committee together with the three previously appointed independent non-executive directors to oversee the investigation, and the continued suspension of trading until the publication of the 2023 annual report.

Nuohui Health announced on March 18 that it would postpone the release of its annual report to March 28. However, early in the morning of March 28, Nuohui Health announced a short trading halt and postponed the release of the annual report again.

The reason for the postponement of the release of the annual report was that the audit firm Deloitte sent a letter to the board of directors of Nuohui Health setting out a number of considerations, including: the effectiveness of the sales of Chang Weiqing, the core product of Nuohui Health, and the commercial substance and commercial rationality of the sales model, the effectiveness of the sales of the puff tube or pyloric tube, the validity of certain sales and marketing expenses, and the commercial substance and commercial reasonableness of the relevant marketing activities. Deloitte believes that an independent investigation is warranted.

Zhu Jiang, CEO (CEO) of Capitalwatch, who had shorted Nuohui Health in 2023, told the Economic Observer that he mailed materials to the Hong Kong Independent Commission Against Corruption (ICAC) in September 2023 to report Deloitte about possible misconduct in the audit process of Nuohui Health.

Nuohui Health said in the announcement that the audit committee of Nuohui Health has appointed a third-party investigator to conduct an independent investigation, and the company is currently providing information and documents to communicate with all parties to solve the problem.

Many cancer early screening practitioners speculated that the delay in announcing the results and conducting an independent investigation may be related to the "financial fraud" short-selling incident suffered by Nuohui Health last year. Nuohui Health's performance has been relatively good in the industry, and peers are very concerned about the survey results.

An employee of Nuohui Health said that the company's payday is on the 10th of each month. On April 10, he received his salary as usual. At present, his work is also carried out normally. The departments that cooperate with the survey should mainly be the sales department and the finance department, but not everyone in the department needs to cooperate with the investigation, and the work of front-line employees has not changed at present.

Profit forecast

Founded in 2015, Nuohui Health focuses on the track of early screening of high-incidence cancers, and was listed on the Hong Kong Stock Exchange in February 2021, becoming the "first stock of early cancer screening in China". At a time when peers in early cancer screening are struggling with the difficulty of obtaining clinical product certification and commercialization, Chang Weiqing, a colorectal cancer screening product of Nuohui Health, was approved for marketing in November 2020.

In January this year, Nuohui Health released its 2023 annual performance forecast, announcing that it would achieve after-tax profit in the first year, with a total annual income of 1.98 billion yuan to 2.05 billion yuan, a year-on-year increase of about 1.6 times, receivables and advance receipts of 1.38 billion yuan to 1.46 billion yuan, and gross profit of 1.81 billion yuan to 1.87 billion yuan, a year-on-year increase of 1.7-1.9 times.

Nuohui Health has three products, Chang Weiqing is used for colorectal cancer screening and is a cancer screening product approved by the State Food and Drug Administration, pyloric tube is a consumer self-tester for Helicobacter pylori approved by the State Food and Drug Administration, and Puff tube is the first approved fecal occult blood self-tester in China.

According to the performance forecast, the sales revenue of the core product Chang Weiqing in 2023 will be 1.18 billion yuan to 1.21 billion yuan, a year-on-year increase of more than 230%. Chang Weiqing's annual gross profit from sales is expected to be between 1.08 billion yuan and 1.11 billion yuan, a year-on-year increase of more than 260%. The sales revenue of Youyouguan in 2023 will be 450 million yuan to 470 million yuan, more than double the year-on-year increase. The annual sales revenue of Puff Tube was 350 million yuan to 370 million yuan, a year-on-year increase of seven or eight percent.

In addition to sales revenue and year-on-year growth, Nuohui Health also disclosed in the performance forecast that Chang Weiqing's largest source of revenue and the fastest growing channel is hospitals, followed by consumer medical channels (referring to insurance companies, population management companies and e-commerce platforms) and physical examination centers.

In accordance with the Listing Rules, Nuohui Health is required to release its 2023 results by 31 March 2024, and if it is unable to announce preliminary results, it must publish results based on financial results that have not been agreed with the auditors.

Nuohui Health replied to the Economic Observer that it is currently under audit, and an announcement will be issued after the audit is completed.

Short the report

Market rumors that the delay in the release of Nuohui Health's annual report and the independent investigation may be related to the previous "financial fraud" short selling incident.

In August 2023, the "Investigation Report on the Falsification of Financial Data of Nuohui Health" (hereinafter referred to as the "Short Selling Report") circulated in the industry. According to the report, Nuohui Health has created ninety percent of false sales revenue by constantly pressing goods, and the real business volume of Nuohui Health is far less than its published financial data. The text of the short selling report indicates that the report was issued by Capitalwatch.

Zhu Jiang, CEO of Capitalwatch, told the Economic Observer that the short-selling report was written by his team. In September 2023, he mailed materials to the Independent Commission Against Corruption in Hong Kong, reporting possible misconduct in Deloitte's health audit process. In his view, the current problems encountered by Nuohui Health are indeed related to the previous accusations, "ICAC only needs clear clues to point, and does not need us to provide evidence, and of course will not notify us of the results of the investigation."

According to the short report, it lasted 16 months to follow up and investigate all over the country, through face-to-face interviews, telephone interviews with employees of Nuohui Company (in-service or resigned), visits to hospitals, cooperative distributors, and companies in the same industry, collected e-commerce platform data, government publicity projects and other relevant information, analyzed Nuohui Health's public financial reports and promotional information, Nuohui medical laboratories, etc., and reached the conclusion of the investigation after sorting out and summarizing and rigorously calculating.

The short-selling report estimates that the actual sales of Nuohui Health in 2022 will be 76.95 million yuan, a difference of 9 times from the 765 million yuan it announced.

The short selling report analyzes the sales of three products of Nuohui Health - Chang Weiqing, Youyou Tube, and Pu Pu Tube from four channels: professional medical institutions, public health screening projects, private physical examination institutions, and e-commerce platforms, and it speculates that the performance data disclosed by Nuohui Health is about 10 times that of the real performance data.

The short-selling report also said that Nuohui Company has been pressing goods through various ways and channels every year, and the validity period of Chang Weiqing's products is 12 months. After the extracorporeal bypass operation of Nuohui Health has passed the expiration date, such products can become recognized revenue in the company's sales financial data in the next year, creating the illusion of prosperous sales.

Zhu Yeqing, chairman and CEO of Nuohui Health, told the Economic Observer in August 2023: "(The short selling report) is very unprofessional and too far from the truth. Nuohui Health is responsible for every data released in the financial report, we can stand up to scrutiny, and all investors are welcome to go to Nuohui Health's partners to do on-site research. ”

At the investor exchange meeting at that time, Zhu Yeqing and other executives of Nuohui Health responded to the questions listed in the short selling report one by one, and also used Nuohui Health to pay more than 75 million yuan in taxes in the first half of 2023 to prove its performance.

When explaining the revenue recognition process of Nuohui Health, Gao Yu, chief financial officer of Nuohui Health, said that the audit firm of Nuohui Health is Deloitte, and when auditing the semi-annual report and annual report, Deloitte will send a paper confirmation letter to the client, and the paper confirmation letter needs to be kept on file after being sent back to Deloitte.

This time, Deloitte raised a number of concerns for its 2023 results.

Independent investigation

In its March 28 announcement, Nuohui Health said that the board of directors does not consider it appropriate to publish the unaudited management accounts for 2023 at this stage, as the management accounts may not accurately reflect the financial performance and condition. Correspondingly, the meeting of the Board of Directors to review and approve the release of the 2023 results has also been postponed.

At present, Nuohui Health is conducting an independent investigation.

According to the latest announcement, the board of directors of Nuohui Health has voted to establish an independent special committee, which has 5 people, namely Yu Danke, Wu Hong, Li Guodong, Liu Yiji, Wu Yongqian, and Liu Yiji serves as the chairman.

Yu Danke, Wu Hong and Li Guodong are all independent non-executive directors appointed in February 2021, while Liu Yiji and Wu Yongqian are the latest independent non-executive directors appointed by Nuohui Health. Liu Yiji and Wu Yongqian will have an initial term of three years, with the former earning 50,000 yuan per month and the latter earning 40,000 yuan per month.

Liu Yiji is a senior director of Dahua Ma Shiyun Certified Public Accountants Co., Ltd., and Wu Yongqian is a senior director of Jihong Co., Ltd. (002803. SZ). Both have worked at Deloitte, with Liu Yiji serving for 25 years and 17 years as a partner, and Wu Yongqian for four years at Deloitte. Both have extensive experience in financial reporting, internal investigations and internal controls.

According to the announcement, the primary duties of the Independent Special Committee are: to review, refine and determine the scope of the investigation, to undertake and supervise the conduct of the investigation, to retain an independent third-party professional body to assist in the investigation as it deems reasonably necessary or appropriate, to report the results of the investigation to the Board of Directors, and to make recommendations to the Board on appropriate action, if any, to be taken.

The Economic Observer asked Nuohui Health about the estimated length and progress of the investigation, but did not receive an effective response.