Firms desert US stock markets

When 7 Days Group Holdings Ltd announced in September that it had received a buyout proposal to be taken private, the Chinese budget hotel operator's US-listed shares soared to a four-month high.

Prior to the announcement, the shares, which trade on the New York Stock Exchange, had tumbled 23 percent in 12 months, amid investor worries over corporate governance that hurt valuations of Chinese companies.

Last week, 7 Days became the latest US-traded Chinese company to go dark, after a group that included Washington-based private equity firm Carlyle Group LP and the company's co-chairmen sweetened its offer to $688 million.

More than two dozen US-listed Chinese companies have retreated from the US stock market in the past 15 months, amid scrutiny by US regulators and short-sellers and shrinking advantages from US listings.

"If I were a Chinese company in the US right now, and I'm approached by a private group, at an attractive valuation, I would be open to dialogue," said Charles Lee, a Stanford University accounting professor who studies stock value and the psychology that affects stock prices.

"There is a very strong negative US sentiment about Chinese stocks, even the ones that have absolutely no problem."

The US Securities and Exchange Commission has been suing Chinese affiliates of US accounting firms for failing to turn over data on US-listed Chinese companies involved in what it terms potential wrongdoing. At the same time, aggressive short-sellers - the most prominent among them Carson Block's Muddy Waters LLC - have accused a number of Chinese companies trading in the US of accounting irregularities, depressing share values for the group. As a result, the companies have seen new capital flows reduced to a trickle, negating a major advantage of a US listing.

In 2012, 27 China-based companies with US listings announced plans to go private through buyouts last year, up from 16 in 2011 and six in 2010, Reuters reported, citing a report by investment bank Roth Capital Partners. About 50 mostly small Chinese companies deregistered with the Securities and Exchange Commission, ending their public-disclosure obligations, Reuters said. That figure was up from about 40 in 2011 and the most since the SEC began record-keeping in 1994.

In December, amid a continuing rash of accounting fraud among US-listed Chinese companies, the SEC sued Chinese affiliates of five US accounting firms for failing to turn over audit information on nine unidentified Chinese companies. The firms have refused to comply with the SEC's demands because Chinese law views any information about domestic Chinese companies as a state secret.

Shares of several US-listed Chinese companies fell by a double-digit percentage in December.

Short sellers' impact

Short-sellers focusing on Chinese firms' accounting practices have contributed significantly to the group's stock drop, Lee said. In late 2011, Block's Muddy Waters research firm accused Chinese digital advertising company Focus Media Holding Ltd of accounting irregularities and asset inflation, including overpaying for acquisitions to mask financial losses. Although Focus Media denied the allegations, the report helped drive down the price of Focus Media's Nasdaq-traded shares by 40 percent in one day, slicing $1.3 billion off its market value, Bloomberg reported. In August, Focus Media agreed to accept a $3.7 billion buyout offer from a private equity group that included Carlyle and Fountain Vest Partners Co. The deal, the largest of its kind ever in China, is expected to close sometime in spring.

Lee, a former global head of equity research at Barclays Global Investors, said the unfortunate aspect to the Chinese companies' withdrawal from the US stock market is that the stock prices of "some very good Chinese companies have been tainted by this process, and it takes a while for their credibility to be reestablished in the US market. And some very good (Chinese) entrepreneurial companies who might have listed in the US and accessed the US capital base, cannot do that right now."

Although Lee says taking a hard-nosed approach against fraud is necessary, "it's an oversimplification to say that there's a China factor at work," he said. "Some of this is potentially overdone."

"If you look at the type of stocks that short-sellers target, they tend to be long cash duration stocks. Or stocks where it's very difficult (for the accusers) to verify their claims."

Lee said research shows that "all the stock prices of the Chinese-listed companies in the US were negatively affected by the media coverage of the relatively few that were accused of accounting frauds". The display of "negative sentiment towards Chinese companies" depressed the stock prices of Chinese companies (including those) "that have never been accused of anything."

Document access limited

Jim Fink, senior online editor for the Investing Daily website, writes that the potential for Chinese accounting fraud is greater today because China has started to limit public access to the financial reports that Chinese companies file with Chinese regulators.

Muddy Waters flagged potential accounting frauds in China by uncovering discrepancies between the filings made with Chinese regulators and those with US regulators, Fink wrote.

"Chinese companies were much more likely to be honest in their Chinese regulatory filings because accounting fraud in China can lead to a death sentence," he said.

michaelbarris@chinadailyusa.com