Investors shun Chinese IPOs

Written by Bloomberg | Updated: Apr 20 2012, 15:20pm hrs
Profit warnings, auditor disputes and delistings involving Chinese companies trading on foreign exchanges are fueling 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% below their offer prices, according to data compiled by Bloomberg. The MSCI World Index has gained 10% 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%. 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% 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 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, 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.

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 about inadequate due diligence on the part of investment bankers who underwrote the IPOs of companies in 2010.