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Monday, 24 March 2014

Chinese #IPOs Risky Business

Chinese IPOs in the US – How Low Should You Go?

So Weibo and Alibaba are planning to go public in the US. They follow a number of other Chinese companies that already went public. What has the record of these Chinese IPOs been?

US investors are generally a pretty trusting crowd. Partly this is because the word “China” makes them think of vast numbers of people and therefore presumably vast revenues and earnings. So Chinese companies look like treasure troves to many US investors, particularly unsophisticated ones. And when a new Chinese company comes to the US to go public, it’s not just the treasure aspect that is attractive. US investment banks and stockbrokers promote Chinese stocks aggressively since they all get paid commissions on the stocks they sell, even if the company is terrible or its stock performs disastrously later.

Of course, that’s exactly what has happened to many Chinese companies that went public in the US. The poster-child is Sino-Forest, whose financial statements were falsified and largely fraudulent at least under US accounting rules.

And Sino-Forest was only one of many Chinese companies whose financials were either misleading or even fraudulent. Currently there is the well-publicized example of the Chinese company Mindray whose financial statements seem to be remarkably similar to those of Sino-Forest in terms of their many problems. So now Chinese companies have a very bad reputation in the US, many being regarded as dishonest or even fraudulent.

A big part of the problem is the huge difference in auditing and accounting standards between the US and China. Right now there is a major argument between US and Chinese regulators about whether or not US regulators can get access to the working papers of Chinese auditors, with Chinese regulators so far refusing to allow that. 

That makes US investors very wary because they don’t know how to judge the quality of financials of Chinese companies especially after their experience up til now with some of the Chinese companies that already did IPOs and whose prices later crashed when the low quality of their financials became known.

Even in the best of times we are highly skeptical about investing in Chinese stocks, for obvious reasons of transparency, symmetry of accounting and audit standards as well as the cultural and political risks. Moreover, China' s bubble economy has the smell of asset and profit inflation which attracts the usual suspects. All this brings back memories of Enron, MCI Worldcom, and Bre- Ex to name a few.

That aside, the financial structure is now poised to unwind and experience the consequences of overly aggressive lending practices - Banks will ne doubt look  to take their mistakes off the books and pass them on to naive investors. Good luck. We have no interest in getting caught in these IPO and other securities traps.

March 24, 2014

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