Moody’s Sparks West China Cement Rout on ‘Red Flags’ Report

Moody’s Investors Service cited five Chinese companies as having more “red flags” on corporate governance than others it examined, sending shares of West China Cement Ltd. (2233) to a record decline.

The ratings company looked at criteria that “highlight issues meriting scrutiny to identify possible governance or accounting risks,” analysts led by Elizabeth Allen in Hong Kong wrote in a report issued yesterday. All 61 companies Moody’s examined raised “red flags,” with West China Cement, Winsway Coking Coal Holding (1733), China Lumena New Materials Corp. (67), Hidili Industry International Development Ltd. (1393) and LDK Solar Co. cited as “negative outliers.”

These companies all raised at least nine out of 20 possible red flags, more than were raised by Sino-Forest Corp., the tree-plantation owner that fell 83 percent last month after being targeted by short seller Carson Block. West China Cement Chairman Zhang Jimin’s 41 percent stake in the company, cited as having the most red flags, dropped by as much as HK$1.3 billion ($167 million), according to data compiled by Bloomberg.

“Investors have already been nervous about this kind of news and it’s making them lose confidence in some private Chinese companies,” said Ben Kwong, chief operating officer at KGI Asia Ltd. “In the short term, investors will be more prudent in investing in them.”

Sin Lik Man, West China Cement’s board secretary, said that the company is “absolutely” in line with international financial reporting standards.

‘Misleading’ Report

“I disagree with Moody’s claim and think it is misleading,” Sin said by telephone today.

Huang Lanyi, Hidili Industry’s board secretary who is in charge of investor relations, said by phone today that the Moody’s report is “not based on fact.”

LDK Solar spokesman Frank Yao said he couldn’t immediately comment on the report.

Winsway Coking Coal issued a statement to Hong Kong’s stock exchange today saying the company had taken notice of the Moody’s report and that it doesn’t believe it appropriate to comment at this moment.

Calls to China Lumena New Materials offices in the city of Chengdu went unanswered and an employee at its Hong Kong office, who refused to give her name, declined to comment. Stan Neve, an external spokesman for Sino-Forest in New York, declined to comment.

Shares of West China Cement fell 10.3 percent to HK$2.54 yuan as of 2:13 p.m. in Hong Kong, poised for the biggest drop since its listing in August 2010.

Bond Yields

Yields on West China Cement’s $400 million of 7.5 percent bonds due January 2016 jumped 85 basis points to 9.434 percent as of 9:48 a.m. in Hong Kong. That’s the biggest jump since June 8 and set for the highest level since June 27, according to Royal Bank of Scotland Group Plc prices.

Winsway Coking Coal’s stock fell 6.8 percent to HK$3.00 as of 2:13 p.m., poised for the biggest drop in five months. The company’s $500 million of 8.5 percent, five-year notes sold in April were on track for their biggest one-day drop as of 10:05 a.m. in Singapore, falling to 91 cents on the dollar to yield 10.982 cents from a close of 93 cents yesterday, according to BNP Paribas SA prices.

Hidili Industry’s shares fell 5.7 percent to HK$6.15 as of the trading break. The yield on Hidili Industry’s $400 million of 8.625 percent notes due November 2015 rose 51 basis points to 9.705 percent, on track for their biggest one-day gain since June 3, RBS prices show.

Shares of Lumena New Materials fell 9.2 percent in Hong Kong trading to HK$2.76 as of 2:13 p.m. in Hong Kong.

LDK Solar Debt

The yield on LDK Solar Ltd.’s 1.7 billion yuan ($263 million) of 10 percent notes due 2014 rose to 12.753 percent as of 10:00 a.m. in Singapore from 12.512 percent yesterday, Credit Suisse Group AG prices show. Investors haven’t demanded a higher risk premium to hold the solar wafer maker’s notes since they were sold in February. LDK Solar’s stock fell 1.8 percent to $6.59 in New York Stock Exchange trading yesterday.

Moody’s didn’t change debt ratings on any of the companies in its report. “We don’t find the results surprising, in a way, because the issues we flagged are issues we are aware of and are in the rating,” Moody’s analyst Allen said today by telephone. “We are not looking at new information and saying these make these companies look more or less risky.”

West China Cement’s chairman and his daughter own 44 percent of the shares, it’s changed auditors twice and had inadequate compliance with International Financial Reporting Standards before listing in Hong Kong in August 2010, Moody’s said in its report.

Board Secretary Sin said West China Cement switched its auditor to PricewaterhouseCoopers LLP so it could list shares in Hong Kong and then switched to Deloitte Touche Tohmatsu “purely due to lower costs.” The chairman and his daughter’s stake in the company “poses no risk at all,” Sin said.

To contact the reporters on this story: Kana Nishizawa in Tokyo at knishizawa5@bloomberg.net Mohammed Hadi in Hong Kong at mhadi1@bloomberg.net

To contact the editors responsible for this story: Darren Boey at dboey@bloomberg.net

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