Mainland Chinese companies have raised $3,526 billion since Tsingtao Brewery became the first to sell its shares in Hong Kong 20 years ago.
The 20th anniversary celebrations of mainland Chinese companies listing in Hong Kong, marked in July, look set to be dampened by fresh allegations.
US research group Glaucus says it is preparing to disclose corporate governance failings by mainland Chinese companies listed in Hong Kong as well as Singapore and seek to profit from a subsequent drop in their share prices.
Glaucus is best known for uncovering widespread fraud at China Metal Recycling Holdings. The California-headquartered research boutique’s report resulted in Hong Kong’s financial watchdog suspending trading in the scrap metal merchant’s shares in January and the start of liquidation proceedings in July.
Meanwhile, according to local media reports, chairman Chun Chi Wai was arrested on Monday. The Hong Kong police force would only confirm on Tuesday that a 47-year-old man with the surname Chun had been arrested on suspicion of falsifying financial data.
Glaucus is now rooting out fraud at other companies listed in Hong Kong and Singapore. “We’re pretty far along on a couple of ideas,” Soren Aandahl, director of research at Glaucus Research Group, told FinanceAsia.
He declined to give the names of the companies he was investigating.
This is not a new strategy. Other hedge funds have questioned the bookkeeping of mainland Chinese companies and bet their shares will fall. But the hedge fund’s comments are a timely reminder that Hong Kong needs to keep a close eye on companies raising money in the city, even as it celebrates the twentieth anniversary of the first mainland company listing on its exchange.
Mainland Chinese companies have raised $3,526 billion since Tsingtao Brewery became the first to sell its shares in Hong Kong 20 years ago. Waves of mainland Chinese IPOs have transformed the bourse into one of the biggest exchanges globally. However, mainland companies have also been at the centre of some of the city’s largest corporate governance scandals.
“Mainland Chinese companies listed in Hong Kong and Singapore are the biggest opportunity set. That’s where we generate our most fruitful ideas,” Aandahl said. “If this were 1999 we’d be looking only at Internet companies,” the 32-year old analyst said.
Glaucus also invests in other emerging markets such as Brazil and is studying taking long positions and acting as a shareholder activist in Canada. But it sees shorting the shares of fraudulent mainland Chinese companies as a rich seam that is nowhere near played out.
Chinese companies have been selling their shares on exchanges around the world and most list in Hong Kong which is on their doorstep. Sino-Forest, a Chinese timber company listed on the Toronto Stock Exchange, filed for bankruptcy protection amid allegations of accounting fraud.
The work of Glaucus and its peers may also spur bankers to delve deeper into the accounts of the companies they help IPO. In Hong Kong, the Securities and Futures Commission’s has drawn up new rules, which come into effect on October 1, making IPO bankers criminally liable for any false company statements in the listing documents.
Bankers face up to three years in jail and a fine of up to HK$700,000 if they sign off on an untrue statement.
Glaucus’ Aandahl sees his work as a wakeup call to other investors. “It’s shocking how many investors don’t read company filings,” said Aandahl.
He also says that his detective work complements regulators’ efforts to raise the bar for Chinese companies looking to list. This will result in a more efficient market place where companies can raise capital at a lower cost from investors who are not demanding a premium in case a Chinese mainland company is fraudulent.
“We are making it easier for high-quality companies to raise money, because right now they are being grouped together with the bad apples,” said Aandahl.
Aandahl said that Glaucus screens thousands of companies for red flags. The item that first caught his eye in China Metal Recycling’s financial filings was that the revenue to employee ratio was 10 times higher than any other major scrap metal company in the world and six times higher than Apple, widely regarded as one of the most productive companies in the world.
UBS and China Merchants Securities advised CMR on its IPO in 2009.
Finally Glaucus issued a report sending a “strong sell” signal to investors and called CMR’s claim to be the largest scrap metal recycling company in China “A lie”.
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