Investors Shun Chinese IPOs

Disputes with auditors undermine value of Chinese companies.

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 percent below their offer prices, according to data compiled by Bloomberg. The MSCI World Index has gained 10 percent in the same period, while the 407 initial public offerings in the U.S. since the beginning of that year have advanced on average 4.4 percent.

Hong Kong Warnings

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.

Revenue Declines

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

Reverse Mergers

Chinese enterprises that completed foreign IPOs in the early 2000s have done better. The 91 companies that sold shares overseas from 2001 through 2004 and are still trading have gained on average 289 percent from their offer prices, according to data compiled by Bloomberg. That compares with the MSCI World Index’s 32 percent gain from its average in those four years.

Underwriters Liable

Hong Kong’s Securities and Futures Commission may make banks arranging IPOs liable for statements in their clients’ prospectuses to prevent fraud by locally listed Chinese companies, Martin Wheatley, head of the agency at the time, said last year. The commission has inspected 17 listing sponsors since late 2009 and found deficiencies in some of their work, according to a report published by the regulator in March 2011.

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