Profit warnings, auditor disputes and delistings involvingChinese companies trading on foreign exchanges are fueling investordistrust, wiping out valuations and poisoning the market for newlistings.

The 180 Chinese firms that went public in New York, Hong Kongand on other global exchanges since the start of 2010 are tradingon average 21 percent below their offer prices, according to datacompiled by Bloomberg. The MSCI World Index has gained 10 percentin the same period, while the 407 initial public offerings in theU.S. since the beginning of that year have advanced on average 4.4percent.

At least six disputes have broken out this year between auditorsand Chinese companies listed in Hong Kong. More than a quarter ofChinese firms that went public on the city's main board in 2010, arecord year for volume, have lowered forecasts since they startedtrading, compared with less than 10 percent of non-Chinesecompanies that had IPOs there that year.

“Investors have been concerned: Are these companies accuratelyportraying themselves?” said Kevin Pollack, a fund manager atParagon Capital LP in New York who invests in U.S.-listed Chinesestocks. “There has absolutely been collateral damage.Unfortunately, having big-name auditors and bankers behind acompany doesn't guarantee it's free of issues.”

Investor enthusiasm that allowed a record number of Chinesecompanies to go public abroad in 2010 has evaporated as theaccuracy of financial reporting and the quality of due diligence byIPO underwriters has been called into question. That contributed tomaking the first quarter for global first-time offerings theweakest since the depths of the financial crisis.

Confidence in overseas-listed Chinese stocks had already beenundermined by scandals involving companies that went public in theU.S. through so-called reverse mergers. Now, investors are shunningfirms based in the world's fastest-growing major economy: Of the 57IPOs in the U.S. this year, only one came from China, compared withseven in the first quarter of 2011.

Four Hong Kong-listed Chinese firms, including BoshiwaInternational Holding Ltd., a Shanghai-based Harry Potter apparellicensee, said their auditors resigned this year because ofdisputes over financial data or other key information. That's fourtimes the number in the same period last year and in the firstquarter of 2010. Two other companies reported that their auditorsneeded more time to verify earnings.

Boshiwa, whose shares fell 66 percent from their September 2010listing price, was suspended from trading March 15 after accountingfirm Deloitte Touche Tohmatsu resigned.

Hong Kong Warnings

The disclosures caused Hong Kong's Financial Reporting Councilto announce April 11 that it had identified 13 Chinese companies inneed of close monitoring. The agency, which investigates auditingand reporting irregularities of publicly traded companies, declinedto name them.

Chinese companies listing on global exchanges in 2010 set arecord: 110 IPOs, up from 67 in 2009 and almost twice the numberlast year. That prompted Hong Kong regulators to warn at leasteight times since early 2011 about inadequate due diligence on thepart of investment bankers who underwrote the IPOs of companiesthat applied for listings in 2010.

Overseas IPOs by Chinese firms in 2010 accounted for 16 percentof the $199 billion in global IPO proceeds, excluding mainlandChina deals, the data show. In the first quarter of this year,foreign Chinese offerings fell to 5.7 percent of the $11 billionraised worldwide.

Equity markets in China's mainland are closed to foreigninvestors, except as part of investment quotas granted to qualifiedinstitutional investors. Chinese domestic stocks also have faredpoorly since the beginning of 2010, with the benchmark CSI 300Index down 27 percent. In December, the index fell to its lowestlevel since February 2009 on concern that the country's economy wasslowing. The index has rebounded 14 percent since then onspeculation that the government will further ease monetarypolicy.

With China's economic growth target revised down by thegovernment to 7.5 percent this year, the lowest goal in eightyears, investors may be less willing to tolerate risk.

“Chinese companies in the private sector are bearing the bruntof the country's economic slowdown, leaving investors nervous abouttheir growth prospects,” said Ronald Wan, a Hong Kong-basedmanaging director at China Merchants Securities Co., which overseesabout $1.5 billion.

Revenue Declines

More than a quarter of the 56 Chinese firms that raised acombined $32 billion in Hong Kong in 2010, including celluloseproducer Sateri Holdings Ltd. and manganese-mining company CiticDameng Holdings Ltd., have lowered forecasts, saying they expected“significant” or “substantial” declines in revenue.

Sateri has fallen 66 percent since its December 2010 debut, andCitic Dameng has dropped 61 percent since listing in November thatyear. Both companies, headquartered in Hong Kong, get more than 70percent of their revenue from China, according to Bloombergdata.

The 56 companies have declined an average of 27 percent fromtheir IPO prices, the data show, while the benchmark Hang SengIndex is down 3 percent from its 2010 average.

“There's a lack of confidence in some of the issuers,” Renato deGuzman, chief executive officer of the Bank of Singapore, thewealth-management unit of Oversea-Chinese Banking Corp. said in aninterview on March 30. “That fear creates a lot of undervaluedshares.”

Chinese stocks listed in New York have fared worse. The 40companies that completed IPOs there in 2010 are down on average 39percent from their offer prices compared with a 22 percent gain forthe S&P 500 Index from its 2010 average, the data show. Thesedon't include the two Chinese businesses that went public byreverse merger, in which a closely held firm buys a publicly tradedshell company and obtains a listing without the scrutiny of the IPOprocess.

In Singapore, the third-biggest market for such listings afterHong Kong and New York, eight Chinese companies that went public in2010 have declined an average of 47 percent from their offerprices, the data show. That compares with a drop of 15 percent forthe 23 non-Chinese firms that had IPOs in 2010.

In March, Vipshop Holdings Ltd., the first Chinese company tohave an IPO in New York since August, raised 39 percent less thantargeted. Shares of the Guangzhou-based online discount store aretrading 9.2 percent lower than its offering price. The number ofChinese firms completing IPOs in the U.S. last year fell to 15 from41 in 2010.

Of the 10 Chinese firms listing outside mainland China thisyear, the lowest number since the first quarter of 2009, eight werein Hong Kong, one was in New York and one in Malaysia.

A second Chinese firm, China Auto Rental Inc., the nation'slargest car-rental company, is scheduled to list in the U.S. nextweek, seeking to raise as much as $137.5 million in an April 24 IPOon the Nasdaq Stock Market.

Reverse Mergers

Chinese enterprises that completed foreign IPOs in the early2000s have done better. The 91 companies that sold shares overseasfrom 2001 through 2004 and are still trading have gained on average289 percent from their offer prices, according to data compiled byBloomberg. That compares with the MSCI World Index's 32 percentgain from its average in those four years.

The 61 Chinese firms that listed overseas in 2011 are down 6percent on average from their offer prices, the data show. The MSCIWorld Index is up 2 percent from its 2011 average.

The disclosures of financial irregularities or auditorresignations last year by Chinese businesses that went public inthe U.S. through reverse mergers resulted in “significant negativesentiment” toward companies based in China, Paragon Capital'sPollack said.

The U.S. Securities and Exchange Commission cautioned investorsin June about buying stakes in such firms, saying they may be proneto “fraud and other abuses.” The Bloomberg Chinese Reverse MergersIndex, which tracks 82 companies, has lost 62 percent since thebeginning of 2010.

Sino-Forest Corp. lost C$3.3 billion ($3.3 billion) of itsmarket value after Carson Block, founder of research firm MuddyWaters LLC, accused the company of overstating its timber holdingslast June. The Toronto Stock Exchange will delist Sino-Forestshares in May, the firm said in an April 5 statement.

Also recently delisted was Longtop Financial Technologies Ltd.,a Hong Kong-based maker of financial software whose leadunderwriters for its 2007 IPO were Goldman Sachs Group Inc. andDeutsche Bank AG. The SEC in December revoked Longtop'sregistration, saying the company was in default for failing torespond to an agency order. D&T Shanghai resigned as Longtop'sauditor after discovering improprieties, according to the SEC.

Underwriters Liable

Hong Kong's Securities and Futures Commission may make banksarranging IPOs liable for statements in their clients' prospectusesto prevent fraud by locally listed Chinese companies, MartinWheatley, head of the agency at the time, said last year. Thecommission has inspected 17 listing sponsors since late 2009 andfound deficiencies in some of their work, according to a reportpublished by the regulator in March 2011.

“The gatekeepers have to be vigilant and that includes all theactors that surround an IPO,” Ashley Alder, Wheatley's successor,said at a press conference in September.

The Hong Kong Monetary Authority, which regulated five financialinstitutions that sponsor initial share sales before supervisionwas transferred to the SFC, also has urged bankers to increasedue-diligence standards and improve their internal supervision ofthe IPO process.

The city's central bank conducted onsite examinations betweenthe fourth quarter of 2010 and the second quarter of 2011 and foundcases where guidance on how to deal with “suspicious scenarios” wasdeficient and where senior investment bankers didn't review theiremployees' due diligence, according to a Nov. 25 report.

Singapore's stock exchange went to court to enforce its listingrules for the first time after a Chinese company ignored a deadlineto appoint a special auditor. The exchange sued China Sky ChemicalFibre Co. and four of its Chinese directors on Jan. 6 to compel theQuanzhou City-based company to have a special auditor investigate“interested party transactions,” a failed land acquisition andcertain costs. The Monetary Authority of Singapore is seeking acourt order to freeze the assets of former China Sky Chemical CEOHuang Zhong Xuan, according to papers filed March 28 with thecity's High Court.

In Hong Kong, Deloitte resigned as Boshiwa's auditor after thecompany failed to provide information it requested, according to aMarch 15 filing to Hong Kong's stock exchange.

Daqing Dairy

Deloitte also resigned as auditor for Daqing Dairy HoldingsLtd., according to a March 30 filing. The Heilongjiang, China-basedmilk producer, which raised $200 million from an October 2010 HongKong IPO, said it had a disagreement with the auditor about theaccuracy of its financial statements. Daqing Dairy has fallen 62percent from its offer price.

Wilfred Lee, a Hong Kong-based spokesman for Deloitte, said hecouldn't comment on the cases because of clientconfidentiality.

In February, Crowe Horwath LLP resigned as auditor for MayerHoldings Ltd. after the Hong Kong-based producer of steel pipesfailed to provide information related to a court case, according toa filing with the exchange. China Forestry Holdings Co., based inChaoyang, China, and suspended from trading since last year becauseof accounting irregularities, said Jan. 6 that its auditor, KPMGLLC, had resigned citing valuation concerns.

Other Hong Kong-listed Chinese companies, includingShenzhen-based Shirble Department Stores Ltd. and Ausnutria DairyCorp. of Changsha, have delayed releasing full-year 2011 earningsbecause auditors need more time to complete work, according tofilings by the firms.

Spokesmen for Ausnutria, Boshiwa, China Forestry and Shirbledeclined to comment beyond the exchange filings. Bunny Lee, a HongKong-based investor relations officer for Daqing Dairy, said thecompany is trying to complete its 2011 earnings report. Mayerofficials didn't immediately respond to a phone call and an e-mailseeking comment.

Doing due diligence is beyond the capabilities of many investorswho remain positive about China's future growth, said ParagonCapital's Pollack.

“We're still very bullish on the China story as a whole, but Ithink all investors are exercising a lot of caution,” he said.“There are certain red flags an investor needs to look for, andthere are certain positive indicators too.”

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