Scandals sting for Bursa-listed China stocks

KUALA LUMPUR: The scandals involving Chinese companies listed on overseas exchanges, involving accounting irregularities and the breaking of listing rules, have done little to improve the poor perception of the ones listed on Bursa Malaysia.

One of the most recent to make news is Sino-Forest Corp, listed on the Toronto Stock Exchange, where “inconsistencies” in the valuation of its forestry assets were detected. Another company is the US-listed Longtop Financial Technologies Ltd, which was found to have “exaggerated” operations.

Sino-Forest’s share price has plunged 87% from a high of over C$25 in late March to C$3.20 on June 30.

Across the causeway, the Singapore Stock Exchange (SGX) also had to deal with a series of accounting scandals and corporate governance failures a couple of years ago, when Chinese companies (commonly known as S-Chips) such as FerroChina went bust and accounting irregularities were detected at FibreChem Technologies, Oriental Century and China Sun Bio-Chem.

Last Thursday, Reuters reported that SGX had reprimanded KXD Digital Entertainment and its former chairman and chief operating executive for breaching listing rules.

According to the report, SGX said breaches uncovered by auditor Stone Forest Corporate Advisory include KXD’s failure to announce that it had ceased all of its business operations and turned into a cash company. It also failed to disclose that Koninklijke Philips Electronics NV had filed and won by default a number of lawsuits against them in 2007/08 and its then chairman and CEO Liu Fusheng, who resigned in 2010, had failed to inform the board of these matters.

There was much scepticism when news emerged that China-based companies were listing on Bursa Malaysia.

The first Chinese company to be listed here was sports shoe manufacturer Xingquan International Sports Holdings, followed closely by Multi Sports Ltd, which raised RM165 million and RM 57.6 million respectively through their initial public offerings in 2009.

They were followed by two others in the same industry, Xidelang Holdings Ltd and K-Star Sports Ltd, and China Ouhua Winery Holdings Ltd, which was listed last November, became the first wine company to list on the Malaysian bourse. Food manufacturer Sozo Global Ltd listed in December 2010 while Maxwell International Holdings Bhd was floated early this year.

The stocks are trading below their IPO prices. K-Star closed at 35 sen last Friday, a pale comparison to its IPO price of RM2.15. China Ouhua closed at 37.5 sen as opposed to its 60 sen debut price. In May, the Chinese winemaker saw 4.49% of its shares transacted off market.

Xingquan fared better at RM1.11 last Friday, but still below its IPO price of RM1.71, while Maxwell closed at 49 sen compared with its IPO price of 54 sen.

Interestingly, most research units at investment banks do not have these stocks under their coverage, including those that were involved in the listings.

“Most are not looking because of the accounting discrepancies that have been reported overseas. This has certainly dragged down the sentiment here,” said a buy-side analyst, adding that most of the Chinese companies are low key.

“Their price-earnings ratios are cheap and the share price seems fair but they just don’t do well. The fundamentals seem fine but there is the worry whether the reported numbers are real,” he said.

Another analyst with an asset management company said the lacklustre performance of these stocks could be attributed to the lack of coverage by brokers.

“Reports by analysts do help investors to make decisions on stocks,” he said.

It is unfortunate that although the China-based companies listed here may seem fine fundamentally, the perception problem has not improved. More so with the latest spate of bad publicity from those listed in other markets.