The Environmental Paper Network (EPN) has submitted a complaint to the Hong Kong Stock Exchange on possible violations of disclosure requirements by Kiu Hung International Holdings Limited (Kiu Hung).[1] This company is interested in buying the Amazar pulp mill project located in the Zabaikalsky Province of Russia, also known as Polaris Project or Polarnaya. The Amazar mill is still under construction but is already one of the best known risky and conflict-prone forest industry investments within Russia by Chinese entities. It has been accused of violating indigenous peoples rights, of threatening unique biodiversity-rich forests along the border, mistreating and discriminating local workers, and the illegal construction of a large dam that blocks migration of rare fish species.

Over the past few months, Kiu Hung has reported on two MOUs[2] to buy the Polaris Project, as well as on a business model, a bond issuance to finance the deal, and the withdrawal of the bond.

A noteworthy aspect is that in these documents Kiu Hung makes no commitment to actually invest in the project, which is still not finalized. Meanwhile, due to lack of investments, the Amazar mill has been excluded from the List of “priority forest industry projects” by the Russian Ministry of Trade and Industry. This means that all the forest leases it obtained without tenders should be annulled in 2019. An important question is would a new owner be able to apply for inclusion in this list again?

There are multiple risks that the company has not disclosed which could result in material losses for shareholders once the transaction is completed. There risks include:

  1. The existence of a large debt to the China Development Bank, and the lack of clarity over who will pay this debt;
  2. The lack of access to sufficient forest resources for the planned operations;
  3. The lack of information about the responsibility for the debts from, and court cases against, Polarnaya Company in Russia;
  4. Disinformation about the ‘logistical advantage’ of being close to a port, which in fact has been closed since 2007;
  5. Lack of disclosure of ESG (Environmental, Social and Governance) risks;
  6. Lack of disclosure of key business details;
  7. Lack of a commitment to invest, which may indicate it does not actually plan to develop the project.

Kiu Hung was recently censured by the Listing Committee of The Stock Exchange of Hong Kong Limited for incomplete and inaccurate disclosure and believe that our observations may show another example of such misconduct. It is hoped that HKEX officials and regulators will pay attention to the lack of disclosure and the problems that would follow if transaction will go on in current form without evaluation and mitigation of all above mentioned risks. Furthermore, observers are seeking to know where and when the ESG reports related to due diligence on this proposed transaction will be made available to the public.

[1] Kiu Hung is listed on the main board of Hong Kong Stock Exchange since 2001 with stock code 00381.