Scotiabank Lifts China Stocks’ Risk Rank After Sino-Forest Halt

Bank of Nova Scotia (BNS) raised its risk rankings on Hanfeng Evergreen Inc. (HF) and Migao Corp. (MGO) after other Chinese companies listed in North America through reverse takeovers plunged.

Ben Isaacson, the Scotiabank analyst, moved the shares to the “caution warranted” category, from “high risk,” in a note to clients dated Aug. 30 and made public yesterday. “Caution warranted” is the second-highest of five Scotiabank risk rankings and indicates an “exceptionally high financial and/or operational risk.”

While the change “is not an attempt to group the two small-cap Chinese fertilizer companies with those Chinese RTOs that have recently been accused of fraud, we are erring on the side of caution,” Isaacson said in the note, referring to companies that went public through a merger with a publicly traded shell company.

A Bloomberg index of Chinese reverse-takeover stocks that trade in the U.S. has plunged 53 percent this year as companies including China MediaExpress Holdings Inc. disclosed financial irregularities or auditor resignations, raising investor concern that there may be widespread fraud.

Shares of Sino-Forest Corp., which went public in Canada through a reverse takeover in 1994, were halted Aug. 26 by the Ontario Securities Commission, which said the company appears “to have misrepresented some of its revenue and/or exaggerated some of its timber holdings.”

Kevin O’Connor, a spokesman for Hanfeng Evergreen, didn’t immediately return a phone call requesting comment on the Scotiabank note.

‘Wide Brush’

“We don’t agree with it, but that’s their format,” Jay Hussey, Migao’s vice president of corporate finance, said in a telephone interview from Toronto. “It’s a paintbrush that’s probably a little wider than it needs to be right now.”

Scotiabank’s Scotia Capital unit assigns the risk rankings in addition to ratings based on share price performance estimates.

Isaacson, based in Toronto, has a “sector outperform” rating on Migao, which fell 6.4 percent to C$3.65 yesterday in Toronto, extending its 2011 drop to 53 percent. He has a “sector perform” rating on Hanfeng Evergreen, which decreased 6.7 percent to C$2.77 is down 54 percent for the year.

The analyst said he has visited several Hanfeng Evergreen and Migao plants in China and isn’t aware of any “non-arm’s- length transactions” of theirs.

In its cease-trade order, the OSC said Sino-Forest “appears to have engaged in significant non-arm’s length transactions which may have been contrary to Ontario securities laws and the public interest.”

To contact the reporters responsible for this story: Matt Walcoff in Toronto at mwalcoff1@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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