Chiho, Scholz face turmoil at start of 2022

The Hong Kong-based parent company of German scrap firm Scholz Group has conducted a major shakeup of its executive staff and board of directors. The set of moves is raising concerns in Europe and beyond about the future of the Scholz network of scrap facilities.

Listings of board members and senior managers on the website of Chiho Environmental Group, parent firm of Scholz, up until about Jan. 7 included former Chiho CEO Rafael Suchan among that staff, but with the parenthetic note “Suspension of duty with effect from 6 December 2021.”

A source indicates to Recycling Today that Suchan and other executive-level employees dismissed from their roles at Chiho and Scholz have been dispatched with no direct conversation or communication with the majority shareholder who appears to have engineered the purge.

The company’s own financial reports, and a LinkedIn statement from Suchan himself, indicate Suchan’s departure likely was not tied to his performance.

Suchan begins that statement by writing, “Yesterday, the most exciting chapter in my professional life yet has come to a close.” A couple of paragraphs later, he comments, “I would like to thank all employees of Chiho Environmental Group, Scholz Recycling and all of our subsidiaries across the globe for the trust, the dedication and the hard work in the last two years. We can proudly claim to have been one of the best teams in the industry. The result which we have achieved is a clear turnaround of the company from the previous few years’ decline. And last year’s achievements can be probably considered to be the best in the history of the company.”

In its first half of 2021 financial interim report, Chiho indicates more than 85 percent of its revenue stemmed from its European Scholz operations. Regarding profitability, Chiho’s European operations netted HK$530 million ($68 million), compared with just HK$4 million ($513,000) in its Asia operations. The report also lists an HK$106 million ($13.6 million) loss attributed to “unallocated” reasons.

In a written statement within that report, Suchan writes in part, “The European operations continue to remain our core business and have performed consistently well. Leveraging our century-old roots in Europe, the group has maintained good relationships with our established local customer base, and the European subsidiary alone continues to represent more than 80 percent of our global operation.”

Yet two different sources have told Recycling Today that Suchan and several other executives were dismissed suddenly and notified indirectly late last year. In addition to Suchan, Chief Trading Officer Tom Bird and China region Chief Operating Officer Daniel Huang reportedly have been dismissed, and Chiho Chief Financial Officer Martin Simon has resigned at least one of his positions, those sources say.

On the Chiho board, along with the dismissal of Suchan, former independent nonexecutive board members Jimmy Loke and Frankie Ko have resigned. Per a Jan. 7 statement posted to the Chiho website, the board now consists of majority shareholder Tu Jianhua; Li Linhui (chairman); Yu Miao; Yao Jietian; and Li Zhiguo, who is described as an independent nonexecutive director from Tu’s home city of Chongqing, China, with a background in ferrous metallurgy.

Sources tell Recycling Today Li Linhui is majority shareholder Tu’s personal legal counsel and Yao is Tu’s brother-in-law. Yu’s biography points to a financial background, and he currently serves as president of USUM Investment Group Ltd., another company controlled by Tu.

On the management front, Suchan, Bird and Huang have thus far been replaced by Yulin Liu, who the sources indicate is majority shareholder Tu’s wife. Also being brought back to Chiho is Henry Qin, who served with Chiho in an executive capacity several years earlier.

Veteran metals trader Michael Lion, who served on the Chiho board of directors in the early 2010s, describes the sudden changes as “really one of the most appalling breaches of corporate governance and common sense that I have ever seen.”

Both Lion and another source, who prefers to remain anonymous, say the sudden moves are tied to a massive debt load and recent bankruptcy case involving Tu’s other holdings, known as the Loncin Group and USUM Investment Group.

The anonymous source says the moves are “all driven by Tu’s financial problems with Loncin and USUM. Such a pity, because Scholz and Chiho performed really well.”

Loncin, on the other hand, is in the midst of a restructuring agreement awaiting final approval from the Chongqing (China) Intermediate Court.

An online posting on China’s Baidu website attributed to the AI Finance and Economics Society puts the Loncin debt load at some 33.6 billion Chinese yuan ($5.27 billion). Another online report indicates the debt is tied to investments in China’s beleaguered property sector. A late December 2021 news item from the Finance.Sina website says “the overdue amount of debts of Loncin Holdings” is 14.5 billion yuan ($2.27 billion), with nearly half that amount already being sought through lawsuits.

Suchan, in his LinkedIn post, writes in part, “Due to the big debt load and without the apparent ability to serve due debt payments, it has become increasingly difficult in the last quarter of 2021 to balance the major shareholder’s interests with the fiduciary duties of a professional management towards the company, minority shareholders, financing partners and other stakeholders. On various occasions, it has become a great challenge for us as a professional management team to operate upholding the interests of the company by adhering to proper corporate governance.”

The future of the Scholz assets in Europe likely will be watched by metals recyclers, with Lion referring to the business unit as “a solid capable company with good staffing, a good commercial reputation and a good network.” The Scholz website currently lists 70 locations.

One possible outcome involves the potential sale of the Scholz assets. Such a move could be structured to raise cash for Tu, but it would leave Chiho with very little left in its own portfolio.

Whether minority investors have a path to challenge the sudden changes enacted by majority shareholder Tu remains a question.

“I am stunned as of yet there is no known investigation on the part of HKEX,” says Lion, referring to the Hong Kong stock exchange, where Chiho stock is listed and currently trading at about 15 cents (U.S.) per share. “When I was part of Chiho, they were rigorous in their requests about all sorts of things,” Lion says of HKEX.

The veteran trader concludes, “This seems to me to be an egregious use of corporate governance tools by Mr. Tu. I hope they have started an investigation. Do the people making these decisions not grasp corporate governance obligations? It is not their own [private] company, but they operate as if it is.”

Toward the end of his LinkedIn post, Suchan comments, “People also asked whether Hong Kong, as the world’s biggest stock market, may have improvement potential with regards to the independent oversight of corporate boards.”

Chiho has not replied to a Recycling Today request for a statement on the reasons for Suchan’s removal from its board of directors.