Mascotte reveals details of disastrous acquisition

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The reasons behind Taiwanese polysilicon producer Mascotte Holdings‘ scramble to raise funds through multiple shares issues has been laid bare in the company’s six-month trading update.

Given the full, astounding, details of the disastrous acquisition of Sun Materials and its Yi-Lan polysilicon production plant, it is not at all surprising the statement, released to the Hong Kong Stock Exchange on Friday, concluded Mascotte’s immediate priority is to repair its badly holed balance sheet.

"The future is going to be challeneging," says the update, a candidate for understatement of the year that, given the admission the Yi-Lan plant, whose ability to manufacture multicrystalline polysilicon appears to have been faked by Sun Materials CEO and chief technical officer Dr Wu Yi-Shuen, "has completely lost its capacity to produce any commercially feasible polysilicon."

The report reveals how Sun Materials, after its acquisition by Mascotte, received two anonymous parcels in the mail indicating Dr Wu had faked the production test runs that persuaded Mascotte to continue its full acquisition of the company.

Under questioning at a ‘confrontation’ meeting with Mascotte representatives, Dr Wu admitted pouring a ‘foreign material’ into the site’s reactor to ‘conceal operational processes from engineers of the plant.’

Dr Wu refused to reveal what the material was but, the Mascotte statement adds its directors believe the unidentified substance was polycrystalline silicon.

Mascotte’s report states the matter could not be definitely ascertained because Dr Wu at that point terminated the meeting by resigning on the spot.

The bottom line for Mascotte investors is an impairment charge of HK$844.6 million (US$109 million) which, improbably, was listed as the second most important factor in the company’s HK$963 million loss before tax, behind a HK$104.4 million deficit from finance costs.

Positive comparatives offer no consolation

Good news was thin on the ground and came only from comparisons against the previous year’s figures, with that HK$845 million impairment at least down from the HK$1.9 billion written off from the previous period, again in connection with the Sun Materials fiasco, and at that point put down to a hydroflouric acid problem which had not been spotted in due diligence and would further delay the onset of production of polysilicon.

Unsurprisingly, commercial polysilicon production never started at the Yi-Lan plant.

Despite any comparative progress, the balance sheet at the end of September showed a total deficit of HK$634 million, up from HK$236 million at the end of the previous financial year, which ended on March 31.

There is little succour either from the company’s regional sales profile with the majority of sales – some HK$26.6 million – in the waning European market. Sales fell across every region but the falls were more marked Hong Kong and China.

With the embattled company trying to persuade shareholders to accept the renegotiation of the terms of an HK$885 million bond by issuing shares which could amount to more than 44% of the stock, if converted, the future certainly does appear challenging for Mascotte.

Given the circumstances, the HK$29,000 (US$3,740) profit delivered from Mascotte’s camera accessories business was not much of a filip. Quite a lot more camera parts will have to be shifted to turn Mascotte around.