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.
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.
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.
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.
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.
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.
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.
Since the global economy largely went off the Bretton Woods system where gold deposits was secured by issuance of currency, we have not encountered such a drastic debasement of major currencies. Basically when a country prints their own currency without "significant backing or financial reserves", you are assuming the rest of the world are idiots. If Malaysia tries to do that, nobody will accept the ringgit at 3.0 vs the USD, it becomes monopoly money.
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