Monday, May 21, 2012

Chinese Companies Listed Overseas


Can we at least come to some conclusion about the state of Chinese companies that are listed overseas. We hear of scandal after scandal, from HK to Singapore to the States. Its almost shocking that none in Malaysia has imploded (yet), not that I am wishing any of them to fall out of grace.
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This is not to say that Chinese companies listed in their own China exchanges are all fantastic. There have been plenty of shenanigans there as well, but not as prevalent as those which chose to list overseas. Its not likely that they were better managed, but rather to be caught in China for fraud, bribery, accounting misstatements, etc... poses very big penalties, big fines and sometimes "capital punishment". Maybe overseas laws are more humane and some think they can get away with murder.

Below are some of the bigger scandals (not including the Sino Forest thing): 

2011 - Hong Kong-listed Real Gold Mining Ltd , an Inner Mongolian company, halted trading in its shares on May 27 after a newspaper report said the miner had filed one set of accounts with the Hong Kong stock exchange and a much different one with China's central government. The stock has been suspended from trading since. 

2011 - Hong Kong's securities regulator was seeking to freeze the assets of the chief executive of China Forestry Holdings Co Ltd , which was being investigated for accounting irregularities, a court document showed in February. The Securities and Futures Commission has applied to the high court to freeze up to HK$398 million ($51 million) in assets belonging to Chief Executive Li Han Chun, according to a court statement obtained by Reuters. China Forestry shares have been suspended since Jan. 26 after auditors KPMG found possible irregularities during their audit for fiscal 2010, the company said in a filing to the Hong Kong stock exchange in late January. 

2010 - Chinese textile firm Hontex International Holdings Co Ltd was listed in December 2009 and just three months later, its shares were suspended after the SFC alleged that its IPO prospectus had "materially overstated" its financial position. The SFC has successfully managed to freeze assets equivalent to the sum Hontex raised in its IPO. Investors have yet to see their money returned, with a debate continuing in the courts about the methods the SFC is using to reclaim the money. 

2010 - Shenzhen-listed Yunnan Green Land Biological Technology Co Ltd and its management were reprimanded by the Shenzhen bourse for seriously overstating profit in 2010 and 2009, according to the Shenzhen stock exchange. 

2010 - Huang Guangyu, China's one-time richest man and the founder of retail chain GOME Electrical Appliances Holding Ltd , was found guilty in May of bribery, insider trading and illegal business dealings. He was sentenced to 14 years in jail. 
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2006 - Chinese appliance maker Guangdong Kelon Electrical Holdings Co Ltd and a number of former executives were fined for fraudulent accounting and other improper behavior. The company said it was found to have inflated revenue by 1.2 billion yuan and its profit by 120.42 million yuan between 2002 and 2004. Former chairman Gu Chujun was sentenced to 10 years in prison for embezzlement and accounting fraud. 

2004 - Singapore-listed jet fuel trader China Aviation Oil (CAO) stunned markets with a $550 million trading loss when it took risky bets on oil derivatives, triggering Singapore's biggest corporate scandal since the collapse of Barings Bank in 1995. A Singapore court later sentenced the man at the centre of the scandal -- former CAO Chief Executive Chen Jiulin -- to more than four years in jail. 

2004 - Stephen Wong, chairman and an executive director of China's third-largest television maker, Hong Kong-listed Skyworth Digital Holdings Ltd (0751.HK), was charged by Hong Kong's anti-corruption watchdog with allegedly misappropriating more than $6 million in company funds. Wong was later sentenced to six years in jail for plundering company funds and share option fraud. 

2003 - Zhou Zhengyi, then China's 11th richest man controlling two Hong Kong-listed companies, was detained in 2003 after an investigation into 2 billion yuan in loans obtained from the country's primary forex lender, Bank of China Ltd . Insiders said senior Shanghai government officials, including the city's then-Communist Party boss Chen Liangyu, had been instrumental in helping Zhou win approval for crucial city projects that were later implicated in the scandal. In 2008, a Shanghai court upheld a 16-year jail sentence handed down to Zhou. He was found guilty of five charges including misappropriation of funds, bribery and forging VAT receipts. The scandal had weighed on China's financial markets and sparked a rash of arrests as probes into Zhou's links with the Shanghai government and his lenders widened. Chen Liangyu was sentenced to 18 years in jail in 2008 for taking bribes and abuse of power. 

2003 - Chinese orchid tycoon Yang Bin was sentenced to an 18-year jail term for commercial crimes, including contract fraud, forging financial instruments, bribery and illegally occupying and using farmland. Yang was once ranked as China's second-richest man with an estimated fortune of $900 million. His company Euro-Asia Agricultural (Holdings) Co Ltd was delisted from the Hong Kong stock exchange in 2004. 
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Some interesting statistics, can they lie?: 

a) more than 20 China companies listed in Singapore since 2008 have been delisted or suspended, out of 150 odd China companies listed there 

b) Nasdaq and NYSE Euronext halted trading in the shares of at least 21 small- and micro-cap Chinese companies in the past year. Five such companies were altogether kicked off of the exchanges.That was after 150 companies listed there since 2007 till 2011. So the odds were very close to the Singapore experience. 

c) Since 2010, some 110 China companies have gone public in HKSE, their current prices is 15.8% off their IPO price as of end April 2012. Non- China companies listed in HKSE since 2010 have gained 6.5% over the same period. Statistically, that is "highly significant". 

d) Since 2010 some 53 China companies have listed in the US. As of end of April 2012, they are on average down 38% from their IPO price, compared to a 9.9% gain for other IPOs. 
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 I believe a lot more "action" will be found in the States, where more than 150 China companies have listed there because short selling is allowed, and there are plenty of research firms and hedge funds whose bread and butter is to locate these "inflated" companies, short the hell out of them, expose them, and reap the benefits.  

 Some of the scandals in Singapore red chips: 

1) China Gaoxian Fibre Fabric Holdings Ltd. The Zhejiang-based maker of polyester yarn said on June 30 2011 that its auditors at PricewaterhouseCoopers LLP discovered the company’s bank balance should be less than a tenth of the 1.1 billion yuan ($170 million) it reported in its earnings. 

2) In the case of FerroChina Ltd., shareholders lost their entire investment when the steelmaker was forced to delist in March 2010 after being suspended for more than a year. The company, which hired Merrill Lynch & Co. in April 2008 as an adviser to help it be “the world’s largest and most efficient independent galvanized steel manufacturer,” defaulted on loans in October of that year, weeks after reporting quarterly net income had tripled. 

3) Other stocks that have been suspended include Sino Techfibre Ltd., which said a fire destroyed its financial records after reporting accounting flaws, and China Sun Bio-Chem Technology Group Co., which said a truck transporting its accounting records was stolen. 

4) Fibrechem Technologies. This was one of the best-followed S-chips. The first sign of trouble surfaced when the China-based chemical fibre-maker requested a trading halt on Feb 23 this year 2009. That was the day it failed to release, as scheduled, its fourth-quarter and full-year results. To the dismay of shareholders, the firm's auditors indicated they had difficulty finalising the audit on its trade receivables and cash balances as of the end of December last year. Before the trading halt was imposed, the counter plunged seven cents, or 40 per cent, to 10.5 cents, with 9.68 million shares traded.Meanwhile, founder and chief executive James Zhang resigned from his position as executive chairman. 
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5) Beauty China. Since March 2 (2009), cosmetics firm Beauty China has requested three trading halts. The problem centres on founder and chairman Wong Hon Wai who had, unknown to shareholders, pledged all his stock - 137.5 million shares, or 38.57 per cent of the share capital - to obtain credit facilities. Many agree that the financial arrangement he made with his shares is material information investors should have been told about via stock exchange announcements. The shares plunged a stunning 26 cents, or 70.3 per cent, to 11 cents, with about 6.3 million shares traded, when the first trading halt was lifted on March 3. It soon emerged that his stake was being force-sold by the lender on the open market to help repay the loan. In order to fulfil his obligations to the financier, Mr Wong was forced to sell 28.8 million of the mortgaged shares between March 4 and March 6, noted DBS Vickers. 

6) Sino-Environment. The waste treatment firm's woes started on March 2 2009 when it requested a trading halt after its full-year results. It must have seemed like a recurring nightmare to some investors, given the similarity to Beauty China's problems. Sino-Environment chairman Sun Jiangrong had pledged his entire 56.3 per cent stake or 190.8 million shares, along with other assets, to hedge funds to secure a $120 million loan. As he had difficulties repaying the loan, the forced sale of the pledged shares was triggered. The hedge funds had threatened to sell the shares on the open market. That would cause the control of the company to change hands. It also might plunge the company into a financial crisis, as it would have had to make immediate repayment on a $149 million bond issue - triggered by the change of ownership. Trading was suspended from March 6 and resumed on March 12. After the week-long trading suspension, Sino-Environment plunged 73 per cent to eight cents on a hefty volume of 47.4 million shares. The counter closed at 13.5 cent. 

7) Oriental Century. On March 9 2009, education firm Oriental Century - in which local group Raffles Education had invested $30.2 million for a 29.9 per cent stake - called for a trading halt. It later shocked investors by disclosing that founder and chief executive Wang Yuean had said he 'inflated sales and cash balances' over the years and had diverted unspecified sums to an interested party. He also claimed that he devised fictitious accounting to mislead management and auditors into believing the firm had a cash hoard of 234 million yuan. 
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Trust The Auditors

Trust the auditors? They don't even trust themselves. A small sampling of recent shame for some top auditors is below. The scams perpetrated and slipped past auditors run the gamut from the mundane, such as improper recognition of revenue, to the incredible, such as hiding massive amounts of off-balance-sheet liabilities or falsifying billions of dollars of cash. Surely, we can trust the auditors what, they are big names. Well, lets look at the big auditors responsible for some big mess: 

Arthur Andersen (now defunct): Enron, WorldCom, Nicor, Global Crossing
Ernst & Young: Lehman Brothers, Anglo Irish Bank, HealthSouth
KPMG: Allied Capital, Peregrine Systems, ImClone, Xerox
Deloitte: Nortel, Royal Ahold, Reliant Energy
PwC: Satyam Computer Services, AIG, Tyco
Grant Thorton: Parmalat

Not All Are Rascals

If there are even 20% bad hats, there are still 80% decent companies, assuming all not found to be in breach are really genuine good operators. So, what should they do now that their shares trade at 1x, 2x, 3x PER?

1) Raise dividends to 50% of profits, and make that a company policy. Many will come out with 101 reasons not to do this, you may want to really ask why. Is a company's share price more important than any other issues?

2) Privatise and relist in HK. In 2007, Want Want Holdings, a food and beverage group which makes the popular rice crackers, delisted from the SGX and relisted in Hong Kong in search of better valuations. It is now trading with a PE of over 20x times there, compared with 10 to 15 times in Singapore. So, XDL may have a strong case for moving with this strategy.

If you have invested in a China company listed in Singapore or Malaysia, there is very little you can do after you have asked them to raise dividend. You then have to play the waiting game. I think there are bigger and better fishes to fry while you lock up your capital on something that may take a long time, or worse, turns out to be one of 20% which fell foul of the law later on.

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