For investors in Chinese companies, Sino-Forest Corp., is one of the most infamous examples of an investment gone very bad when it declared bankruptcy in 2012 after once being valued at nearly $6 billion. The commercial forestry company that traded on the Toronto Stock Exchange was exposed as a fraud in June 2011 by Hong Kong based short seller Carson Block and his research firm Muddy Waters. Following the allegations, despite denials from the company’s management, the company was delisted from the Canadian exchange and filed for bankruptcy protection a year later. Big name investors including John Paulson and Anthony Bolton were financially impacted by the failure.
In 2012, US machinery giant Caterpillar got caught out when it made a $677 million purchase of Chinese company ERA Mining Machinery Ltd. In 2013 it wrote down the investment by $580 million citing accounting fraud and misrepresentation.
Clearly investing in Chinese companies can sometimes be a tricky business and despite the scandals of recent years it seems some firms are still playing games with their money. Earlier this year a Chinese manufacturer called Youbisheng Green Paper went involvent after the CEO disappeared without any explanation. In early September China’s Tianhe Chemicals Group was suspended after allegations that it falsified statements to auditors and investors ahead of its Hong Kong listing in June. The allegations were made in a report by stock researcher Anonymous Analytics that Tianhe, which listed the $1.3 billion IPO with the sponsorship of Bank of America, Merrill Lynch and others only had revenues a fraction of those claimed at the listing.
The controversy continues with news yesterday from a German listed company called Ultrasonic AG, a Chinese footwear maker. In a note to the Frankfurt stock exchange entitled “CEO and COO disappeared, most company’s cash missing”, Ultrasonic said its top management had been missing since the weekend and that most of Ultrasonic’s cash funds in China and Hong Kong, where the company primarily operates, “have been transferred no longer being in the company’s range of influence”.
The head of finance Chi Kwong Clifford Chan, who was due to step down in September, and the Supervisory Board are trying to trace Chief executive Qingyong Wu and chief operating officer Minghong Wu and they told investors that they would would update them with progress. The shares dropped 74% to €1.68 (£1.34) following the announcement on Tuesday afternoon, reducing the companies market capitalisation by €58 million and ending at €21.3 million. In August, the company secured a $60 million credit facility from Nomura International (Hong Kong) Ltd to help fund acquisitions and the company said despite the apparent theft it still had resources to meet near term obligations.
On UK AIM there has been controversy this week, although no official fraud as yet. The Chinese maker and supplier of branded sportswear, Naibu Global International is down over 60% in the last week and 20% today to 19.25p since announcing it was cancelling its dividend last Friday. The shares floated in April 2012 at 124p and was trading at around 95p earlier this year. The RNS stated that the company “has announced a slight decline in profits for the six months ended 30 June 2014 despite achieving record sales. It has also suspended its dividend due to significant capital investment planned for the coming year.”
The stock has been a favourite of Investors Chronicle pundit Simon Thompson and this week he announced that he advised readers to sell the shares given the opaque picture behind the dividend cut and the scope for further disappointment. I’m sure investors in Naibu Global are hoping this is no Sinoforest or Ultrasonic and many are waiting with baited breath for further announcements from the company that all is well with its financials and business model. This could be the ultimate contrarian investment but given the sliding share price it feels like trying to catch a falling knife right now.
With the gigantic Alibaba float coming soon (likely to be the world’s biggest IPO), there are high hopes that the sometimes murky world of Chinese corporate governance is improving to enable a sensible investment decision particularly on big cap flotations. There is no suggestion of any problems with Alibaba despite its steep offering price. But even with extensive due diligence, there have been some serious missteps in recent times from seasoned investors suggesting that when problems exist its not always easy to get to the bottom of them. The situation with Naibu is a very interesting one with the dividend cut – management prudence in conserving capital or something more sinister under the bonnet? Time will tell.
Contrarian Investor UK
IMPORTANT: The posts I make are in no way meant as investment suggestions or recommendations to any visitors to the site. They are simply my views, personal reflections and analysis on the markets. Anyone who wishes to spread bet or buy stocks should rely on their own due diligence and common sense before placing any spread trade.
by contrarianuk
Investment in Chinese companies is not always for the faint hearted
Sep 17, 2014 at 4:05 pm in Market Commentary by contrarianuk
For investors in Chinese companies, Sino-Forest Corp., is one of the most infamous examples of an investment gone very bad when it declared bankruptcy in 2012 after once being valued at nearly $6 billion. The commercial forestry company that traded on the Toronto Stock Exchange was exposed as a fraud in June 2011 by Hong Kong based short seller Carson Block and his research firm Muddy Waters. Following the allegations, despite denials from the company’s management, the company was delisted from the Canadian exchange and filed for bankruptcy protection a year later. Big name investors including John Paulson and Anthony Bolton were financially impacted by the failure.
In 2012, US machinery giant Caterpillar got caught out when it made a $677 million purchase of Chinese company ERA Mining Machinery Ltd. In 2013 it wrote down the investment by $580 million citing accounting fraud and misrepresentation.
Clearly investing in Chinese companies can sometimes be a tricky business and despite the scandals of recent years it seems some firms are still playing games with their money. Earlier this year a Chinese manufacturer called Youbisheng Green Paper went involvent after the CEO disappeared without any explanation. In early September China’s Tianhe Chemicals Group was suspended after allegations that it falsified statements to auditors and investors ahead of its Hong Kong listing in June. The allegations were made in a report by stock researcher Anonymous Analytics that Tianhe, which listed the $1.3 billion IPO with the sponsorship of Bank of America, Merrill Lynch and others only had revenues a fraction of those claimed at the listing.
The controversy continues with news yesterday from a German listed company called Ultrasonic AG, a Chinese footwear maker. In a note to the Frankfurt stock exchange entitled “CEO and COO disappeared, most company’s cash missing”, Ultrasonic said its top management had been missing since the weekend and that most of Ultrasonic’s cash funds in China and Hong Kong, where the company primarily operates, “have been transferred no longer being in the company’s range of influence”.
The head of finance Chi Kwong Clifford Chan, who was due to step down in September, and the Supervisory Board are trying to trace Chief executive Qingyong Wu and chief operating officer Minghong Wu and they told investors that they would would update them with progress. The shares dropped 74% to €1.68 (£1.34) following the announcement on Tuesday afternoon, reducing the companies market capitalisation by €58 million and ending at €21.3 million. In August, the company secured a $60 million credit facility from Nomura International (Hong Kong) Ltd to help fund acquisitions and the company said despite the apparent theft it still had resources to meet near term obligations.
On UK AIM there has been controversy this week, although no official fraud as yet. The Chinese maker and supplier of branded sportswear, Naibu Global International is down over 60% in the last week and 20% today to 19.25p since announcing it was cancelling its dividend last Friday. The shares floated in April 2012 at 124p and was trading at around 95p earlier this year. The RNS stated that the company “has announced a slight decline in profits for the six months ended 30 June 2014 despite achieving record sales. It has also suspended its dividend due to significant capital investment planned for the coming year.”
The stock has been a favourite of Investors Chronicle pundit Simon Thompson and this week he announced that he advised readers to sell the shares given the opaque picture behind the dividend cut and the scope for further disappointment. I’m sure investors in Naibu Global are hoping this is no Sinoforest or Ultrasonic and many are waiting with baited breath for further announcements from the company that all is well with its financials and business model. This could be the ultimate contrarian investment but given the sliding share price it feels like trying to catch a falling knife right now.
With the gigantic Alibaba float coming soon (likely to be the world’s biggest IPO), there are high hopes that the sometimes murky world of Chinese corporate governance is improving to enable a sensible investment decision particularly on big cap flotations. There is no suggestion of any problems with Alibaba despite its steep offering price. But even with extensive due diligence, there have been some serious missteps in recent times from seasoned investors suggesting that when problems exist its not always easy to get to the bottom of them. The situation with Naibu is a very interesting one with the dividend cut – management prudence in conserving capital or something more sinister under the bonnet? Time will tell.
Contrarian Investor UK
IMPORTANT: The posts I make are in no way meant as investment suggestions or recommendations to any visitors to the site. They are simply my views, personal reflections and analysis on the markets. Anyone who wishes to spread bet or buy stocks should rely on their own due diligence and common sense before placing any spread trade.