China Aviation Oil’s US$550Million Derivatives Disaster

Date: December 1, 2004

Retail investors of CAO are in a daze. This is because only recently the parent company of CAO sold a sizeable block of shares to unsuspecting fund managers at $1.35 per share. Retail investors naturally took the position that if the smart money finds the stock attractive at $1.35, then at prices below that the stock must be a good prospect. Quite clearly they got it wrong. CAO had in the past repeatedly given assurances to investors that they had a good risk management system in place.

When the third quarter results were announced, CAO should have disclosed its open positions and potential losses, which was material information to investors. This is a failure in transparency.

The immediate questions that arise in the minds of the troubled retail investors are:

It is totally unacceptable for the Management to have allowed losses to run to $900m which is more than 3 times the net worth of the company ($225m as of 31 Dec 2003) and more than 20 times the annual operating profit of the company.

The creditors have recourse, but what about the average man? Small investors are naturally upset with the sudden announcement of gigantic losses of US$550m. Their share value has been suddenly wiped out. As to what happened and who is responsible for this disaster will no doubt be the concern of the relevant authorities.

It is critical to safeguard Singaporeメs reputation in actively promoting good corporate governance. We have spent several years building up our reputation and this episode should not be allowed to mar Singaporeメs good standing in the international community.

We are pleased to see the prompt intervention by SGX in appointing Price Waterhouse Coopers to perform a special investigation into the companyメs affairs. We will await the results of the investigations before advising our members on their course of action.

Mr David Gerald J.
President & CEO
Securities Investors Association (Singapore)