(Yicai Global) Dec. 1 -- Anhui Huamao Textile is taking cotton products manufacturer Xinjiang Lihua, in which it was once a major shareholder, to court, accusing it of cooking its books to turn a huge loss into a big profit within three months, and robbing the fabric maker of a chance to profit from the firm’s recently announced plan to go public, the 21st Century Business Herald reported yesterday.

Huamao Textile started to buy into Xinjiang Lihua in 2010 to ensure its cotton supply. By the end of last year it had paid CNY129 million (USD19.6 million) for a 30 percent stake. However, when Xinjiang Lihua posted losses of CNY440 million (USD67 million) and net assets of just CNY294 million in its third quarter earnings report that year, Huamao Textile began to get cold feet.

Xinjiang Uyghur Autonomous Region law requires shareholders in listed companies to provide guarantees of debt based on their shareholding ratio. Bayin prefecture-based Xinjiang Lihua was said to have borrowed as much as CNY7.27 billion (USD1.11 billion) as of the end of 2018 to fund its expansion.

Anqing, eastern Anhui province-based Huamao Textile said that it could not provide guarantees of billions of Chinese yuan, so the company sold its stake back to Xinjiang Lihua for CNY210 million (USD32 million) in April this year.

Then, a few months later in July, the cotton processor reported a remarkable change in circumstances. In its financial results for the year 2019, Xinjiang Lihua logged net assets of CNY1.2 billion (USD182.6 million), four times what it had at the end of September, and a net profit of CNY406 million, a dramatic turn-around from its losses three months earlier. The company is now said to be preparing for an initial public offering.

Huamao Textile found the reversal in fortune to not be credible. In October its lawyers contacted Xinjiang Lihua to ask to check its 2019 accounts but were refused. Huamao has now escalated the matter to the court but the case has not yet been formally received, the newspaper said.

Huamao Textile’s stock price [SHE:000850] closed up 1.47 percent today at CNY4.14 (USD0.63).

Editor: Kim Taylor