Investors shun China IPOs as disputes erode valuations
Profit warnings, auditor disputes and delistings involving Chinese companies trading on foreign exchanges are fuelling investor distrust, wiping out valuations and poisoning the market for new listings.
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Bloomberg
20 April 2012
Profit warnings, auditor disputes and delistings involving Chinese companies trading on foreign exchanges are fuelling investor distrust, wiping out valuations and poisoning the market for new listings.
The 180 Chinese firms that went public in New York, Hong Kong and on other global exchanges since the start of 2010 are trading on average 21 per cent below offer prices, according to data compiled by Bloomberg. The MSCI World Index has gained 10 per cent in the same period, while the 407 initial public offerings in the US since the beginning of that year have advanced on average 4.4 per cent.
At least six disputes have broken out this year between auditors and Chinese companies listed in Hong Kong. More than a quarter of Chinese firms that went public on the city’s main board in 2010, a record year for volume, have lowered forecasts since they started trading, compared with less than 10 per cent of non-Chinese companies that had IPOs there that year.
“Investors have been concerned: Are these companies accurately portraying themselves?” said Kevin Pollack, a fund manager at Paragon Capital LP in New York who invests in US-listed Chinese stocks. “There has absolutely been collateral damage.
“Unfortunately, having big-name auditors and bankers behind a company doesn’t guarantee it’s free of issues.”
Investor enthusiasm that allowed a record number of Chinese companies to go public abroad in 2010 has evaporated as the accuracy of financial reporting and the quality of due diligence by IPO underwriters has been called into question. That contributed to making the first quarter for global first-time offerings the weakest since the depths of the financial crisis.
Confidence in overseas-listed Chinese stocks had already been undermined by scandals involving companies that went public in the US through so-called reverse mergers. Now, investors are shunning firms based in the world’s fastest-growing major economy: Of the 57 IPOs in the US this year, only one came from China, compared with seven in the first quarter of 2011.
Four Hong Kong-listed Chinese firms, including Boshiwa International Holding Ltd, a Shanghai-based Harry Potter apparel licensee, said their auditors resigned this year because of disputes over financial data or other key information. That’s four times the number in the same period last year and in the first quarter of 2010. Two other companies reported that their auditors needed more time to verify earnings.
Boshiwa, whose shares fell 66 per cent from their September 2010 listing price, was suspended from trading March 15 after accounting firm Deloitte Touche Tohmatsu resigned.
The disclosures caused Hong Kong’s Financial Reporting Council to announce April 11 that it had identified 13 Chinese companies in need of close monitoring. The agency, which investigates auditing and reporting irregularities of publicly traded companies, declined to name them.
Chinese companies listing on global exchanges in 2010 set a record: 110 IPOs, up from 67 in 2009 and almost twice the number last year. That prompted Hong Kong regulators to warn at least eight times since early 2011 about inadequate due diligence on the part of investment bankers who underwrote the IPOs of companies that applied for listings in 2010.
Overseas IPOs by Chinese firms in 2010 accounted for 16 per cent of the US$199 billion in global IPO proceeds, excluding mainland China deals, the data show. In the first quarter of this year, foreign Chinese offerings fell to 5.7 per cent of the US$11 billion raised worldwide.
Equity markets in China’s mainland are closed to foreign investors, except as part of investment quotas granted to qualified institutional investors.
With China’s growth target revised down by the government to 7.5 per cent this year, the lowest in eight years, investors may be less willing to tolerate risk. “Chinese companies in the private sector are bearing the brunt of the country’s economic slowdown, leaving investors nervous about their growth prospects,” said Ronald Wan, Hong Kong-based managing director at China Merchants Securities Co, which oversees about US$1.5 billion.
More than a quarter of the 56 Chinese firms that raised a combined US$32 billion in Hong Kong in 2010, including cellulose producer Sateri Holdings Ltd and manganese-mining company Citic Dameng Holdings Ltd, have lowered forecasts, saying they expected “significant” or “substantial” declines in revenue.
Sateri has fallen 66 per cent since its December 2010 debut, and Citic Dameng has dropped 61 per cent since listing in November that year. Both companies, headquartered in Hong Kong, get more than 70 per cent of their revenue from China, according to Bloomberg data.
The 56 companies have declined an average of 27 per cent from their IPO prices, the data show, while the benchmark Hang Seng Index is down 3 per cent from its 2010 average.
“There’s a lack of confidence in some of the issuers,” Renato de Guzman, chief executive officer of Bank of Singapore, the wealth-management unit of Oversea-Chinese Banking Corp said in an interview on March 30. “That fear creates a lot of undervalued shares.”
Chinese stocks listed in New York have fared worse. The 40 companies that completed IPOs there in 2010 are down on average 39 per cent from their offer prices compared with a 22 per cent gain for the S&P 500 Index from its 2010 average, the data show. These don’t include the two Chinese businesses that went public by reverse merger, in which a closely held firm buys a publicly traded shell company and obtains a listing without the scrutiny of the IPO process.
In Singapore, the third-biggest market for such listings after Hong Kong and New York, eight Chinese companies that went public in 2010 have declined an average of 47 per cent from their offer prices, the data show. That compares with a drop of 15 per cent for the 23 non-Chinese firms that had IPOs in 2010.