Trouble for China's Foreign IPOs

Accounting problems and profit warnings plague new stocks
Photograph by Aaron Tam/AFP/Getty Images

The global appetite for Chinese stocks has encouraged more than 180 Chinese companies to hold initial public offerings on foreign exchanges since 2010. With equity markets in mainland China largely closed to foreign investors, the newly public companies seemed like an ideal way to invest in the China growth story. It hasn’t worked out that way. Many stocks of Chinese companies that went public abroad since 2010 have been plagued by accounting problems and profit warnings that have sent their stocks plunging and poisoned the market for new listings.

Confidence in overseas-listed Chinese stocks was undermined by scandals involving companies that went public in the U.S. through so-called reverse mergers, in which a firm buys a publicly traded shell company and obtains a listing without undergoing the regulatory scrutiny of the IPO process. The troubles of Chinese companies that conducted conventional IPOs have raised questions about the accuracy of financial reporting and the quality of due diligence by the firms underwriting them. “Investors have been concerned: Are these companies accurately portraying themselves?” says Kevin Pollack, a fund manager at Paragon Capital in New York who invests in Chinese companies trading on U.S. exchanges. “Unfortunately, having big-name auditors and bankers behind a company doesn’t guarantee it’s free of issues.”

In Hong Kong, the 110 Chinese companies that have gone public since 2010 have seen their stocks fall an average of 15.8 percent from the initial offer prices through April 26, while non-Chinese companies that had IPOs there have gained 6.5 percent, according to data compiled by Bloomberg. Chinese stocks listed on U.S. exchanges have fared worse. The 53 companies that completed IPOs there in 2010, 2011, and so far this year are down on average 38 percent from their offer prices, compared with a 9.9 percent gain for other IPOs.

The problems extend beyond share-price declines. Four Hong Kong-listed Chinese firms, including Boshiwa International Holding, a Shanghai-based Harry Potter apparel licensee, said their auditors resigned this year because of disputes over financial data or other information. Boshiwa, whose shares fell 66 percent from their September 2010 listing price, was suspended from trading on March 15 after accounting firm Deloitte Touche Tohmatsu resigned. Spokesmen for Boshiwa and Deloitte declined to comment.

More than a quarter of the 56 Chinese companies that raised a combined $32 billion in Hong Kong in 2010, including cellulose producer Sateri Holdings and manganese mining company Citic Dameng Holdings, have lowered their growth forecasts, saying they expect “significant” or “substantial” declines in revenue. Sateri’s stock has fallen 66 percent since its December 2010 debut, and Citic Dameng’s has dropped 61 percent since listing in November of that year.

Officials are concerned about the performance of recent IPOs, Charles Li, chief executive officer of Hong Kong Exchanges & Clearing, told reporters on April 24. “We will continue to look into this area and aggressively enforce,” Li said.

In the U.S., the Securities and Exchange Commission announced on April 23 that it has sued SinoTech Energy, a Chinese oil-field services company that went public in November 2010, for allegedly overstating the value of its assets and misrepresenting the use of IPO proceeds. It was delisted by Nasdaq in January. The company could not be reached for comment. “SinoTech’s brief life as a public company in the U.S. markets has been rife with falsehoods,” David Woodcock, director of the SEC’s Fort Worth regional office, said in a statement.

One result is that the pace of foreign IPOs by Chinese companies has slowed. In the first quarter of this year, foreign Chinese offerings accounted for 5.7 percent of the $11 billion raised worldwide. Overseas IPOs by Chinese firms in 2010 accounted for 16 percent of the $199 billion in global IPO proceeds, excluding mainland China deals. Only two Chinese companies have had IPOs in the U.S. this year: Internet retailer Vipshop and Acquity Group, an online advertising company. Both raised less than their target amounts and are trading below their offering prices. “People are concerned about corporate governance issues and bad press surrounding Chinese companies,” says Nicholas Yeo, head of China and Hong Kong equities at Aberdeen Asset Management in Hong Kong. “China is still compelling in the long term, but how to get access to its growth is challenging.”

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