投資中國企業需做足“功課”

China experts warn investors to be careful

By Emma Boyde

As China continues to open up to international investors, experts warn that it may be wise to remember one of the lessons from 2011 – find out what you are invested in.

This was a lesson that Anthony Bolton, high profile manager of Fidelity’s China Special Situations investment trust was clearly slow to learn. As he announced losses in November last year, he also said Fidelity had taken on the services of five firms to provide specialised due diligence following the “disappointment” of his investment in Chinese reverse merger stocks.

Fidelity would not reveal the names of firms it had engaged, but many in the industry believe it could be investing in the kinds of services provided by Kroll, a company that specialises in fraud investigations, business intelligence and forensic accounting, among other services.

Violet Ho, managing director and head of business intelligence and investigations, Greater China, for Kroll, would not reveal the names of any clients but agrees there is a particular need for specialist due diligence with many Chinese companies.

Fund managers have always done due diligence but this has been restricted to what they would call “equity research”, she says. If investors wonder why this does not appear to be working so well for Chinese companies, she points out the researchers are usually based in head offices in Hong Kong or Singapore rather than on the ground in China. This makes them more vulnerable to misinformation, says Ms Ho.

“There is a flaw, because their equity research is very much based on disclosed documents. As demonstrated in some of the well publicised scandals involving overseas listed Chinese companies, the disclosure documents may not always be reliable and in some cases may even be fraudulent,” says Ms Ho. Modelling based on unreliable information is pointless, “it’s basically garbage in, garbage out”, she explains.

“Foreign investors are easy targets because they lack local knowledge and are unable to see what is happening at the operational level,” she adds.

For most overseas investors, opportunities to invest in China have been so limited that they have been restricted to those companies traded in Hong Kong or North American stock markets. Despite being under the scrutiny of established regulatory authorities, some of these companies have been particularly disappointing. Fraud allegations against some Chinese companies that gained North American listings by reverse mergers resulted in huge falls in share prices – the Bloomberg Chinese reverse mergers index, for example, fell more than 60 per cent in 2011.

Paul Gillis, visiting professor of accounting at Peking University’s Guanghua School of Management, thinks new SEC rules will probably halt the Chinese reverse merger phenomenon. Negative publicity has also helped to highlight the risks for investors of the reverse merger structure.

But he says serious risks for investors remain. For a start, the new rules only relate to companies seeking a listing and do not address the thinly traded companies on the over-the-counter bulletin board or those on the even more thinly traded “pink sheets” market.

Of even more concern, to him, is the “variable interest entity” structure of many overseas traded Chinese companies, under which investors do not own any assets in the parent company that operates the business.

“Ten questions about dodgy deals”, a report on investing in Chinese companies produced in December by Fathom China, an independent research company, also highlights the VIE dangers. “Most VIEs involve Chinese internet companies, for a simple reason: Beijing bars foreign investment in telecommunications, which includes internet companies,” the report says, adding that this includes Nasdaq-listed behemoth Baidu, whose market cap is $41bn.

By Mr Gillis’s calculations, nearly half of the 230 Chinese companies listed on Nasdaq and NYSE have VIE structures, which carry both shareholder and regulatory risks.

The shareholder risk exists because VIE investors only own a share of a contract, which brings the risk that the entity that really owns the company may not respect the contracts.

The other major risk investors face is the regulatory one that Chinese authorities will just crack down on VIEs. There are signs that the government is ready to act, says Mr Gillis, although nothing formal has been announced yet.

It may not be far off though: Fathom China refers to the strained relations between US and Chinese regulatory authorities. In November top officials from the China Securities Regulatory Commission suddenly cancelled a long-planned trip to the US to discuss reverse mergers. Two months earlier, in September, the CSRC called on the State Council to take action against VIE structures.

The general advice for investors appears to be to proceed with caution. Fathom China advises institutional investors to conduct the sort of due diligence that would include verifying clients exist, that production facilities are in operation and that declared acquisitions have been completed. It says it may also be wise to check that peer competitors are aware of the company and that its senior executives are free from lawsuits.

“All of this can be verified without coming into possession of material non-public information which would concern the SEC,” it concludes.

For investors who feel they still need the extra mile, specialist services such as provided by Kroll do not come cheap. But as Ms Ho points out, for a large investor such as a pension fund with perhaps $2m to invest, a small percentage would buy a detailed Kroll investigation. “$20,000 will get you quite a lot of stuff. If there are fundamental deal killers you will get a flavour of it,” says Ms Ho.

Not all Chinese companies listed either overseas or domestically are necessarily bad. As Ms Ho says, many strong Chinese companies with overseas listings have been “dragged through the mud”.

“One piece of mouse dropping will ruin the whole barrel of soup,“ she says.

But doing copious homework on Chinese companies looks like good advice for putative investors.

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投資中國企業需做足“功課”

作者：埃瑪 - 博伊德

隨著中國繼續向全球投資者開放，專家警告稱，銘記2011年的一條教訓或許是明智之舉：搞清楚你所投資的資產是什么。

顯然，引人注目的富達中國特殊情況投資信托(Fidelity’s China Special Situations)基金經理安東尼 - 波頓(Anthony Bolton)吸取這條教訓的速度很慢。去年11月當他宣布該基金虧損時還表示，在他對中國反向并購股票的投資表現“令人失望”之后，富達中國基金使用了5家公司的服務，為其提供專項盡職調查。

富達不愿透露它聘請的這5家公司的名字，但該行業很多人認為，在它正投資的服務中，其中一些可能與德安華(Kroll)提供的服務類似。德安華專門從事欺詐調查、商業情報和法庭會計等業務。

德安華大中華地區商業情報和調查主管、董事總經理何越(Violet Ho)不愿透露任何客戶的名字，但她認同一下觀點：即對于很多中國企業進行專項盡職調查，存在著一種特殊的需求。

她表示，基金經理一直在進行盡職調查，但這被限制在他們所謂的“證券研究”范圍。如果投資者想知道為什么這對于中國企業而言不那么管用，她表示，研究人員經常位于香港或新加坡的總部，而不是在中國內地。這讓他們更容易接收錯誤的信息。

何越表示：“這其中存在缺陷，因為他們的證券研究在很大程度上是基于已披露的文件。正如一些眾所周知、涉及海外上市中國企業的丑聞所證實的那樣，披露的文件可能不總是那么可靠，在一些例子里，甚至可能會具有欺騙性。”基于不可靠信息的建模毫無意義，她解釋道，“基本上是錯進錯出”。

她補充稱：“外國投資者很容易被當成靶子，因為他們缺乏本地知識，無從了解運營層面所發生的事情。”

對于多數海外投資者而言，投資中國的機會非常有限，僅限于在香港或北美股票市場上市的中國企業。盡管處于成熟監管機構的監督之下，但其中一些企業的表現尤其令人失望。針對通過反向并購在北美上市的一些企業的欺詐指控，導致股價大幅下挫，例如，彭博(Bloomberg)中國反向并購指數去年跌逾60%。

北京大學光華管理學院(Peking University’s Guanghua School of Management)客座教授保羅 - 吉利斯(Paul Gillis)認為，美國證交會(SEC)的新規可能會終止中國企業的反向并購現象。相應的負面宣傳，也有利于向投資者強調反向并購結構的風險。

但他表示，對于投資者而言，仍存在重大風險。首先，新規只與尋求上市的公司有關，沒有涉及在場外交易系統上交投清淡、或在交投更為清淡的“粉單”市場交易的公司。

他更擔心的是很多在海外上市的中國企業的“可變利益實體”(VIE)結構，在這種結構之下，投資者并不擁有經營業務的母公司的任何資產。

去年12月份，獨立研究公司Fathom China發布了一份有關投資中國的報告，名為“危險交易10問”(Ten questions about dodgy deals)，也強調了VIE結構的危險。報告稱：“多數VIE涉及中國互聯網企業，原因很簡單：中國政府禁止外國投資于中國電信行業，包括互聯網企業。”報告補充稱，這包括在納斯達克(Nasdaq)上市的大型企業百度(Baidu)，該公司市值為410億美元。

根據吉爾斯的估計，在納斯達克和紐約證交所(NYSE)上市的230家中國企業中，近一半擁有VIE結構，這既存在股東風險，也存在監管風險。

股東風險之所以存在，是因為VIE投資者只擁有合同的一部分，這帶來了一種風險：即真正擁有這家公司的實體可能不會履約。

投資者面臨的另一種主要風險在于監管風險，中國政府將打擊VIE。吉爾斯表示，有跡象顯示，中國政府正準備展開行動，盡管目前尚未公布任何正式措施。

不過，距離這一步可能也已不遠： Fathom China提到了美國和中國監管機構之間的緊張關系。去年11月，中國證監會(CSRC)高層官員突然取消了計劃已久的討論反向并購的美國之行。兩個月前的9月份，中國證監會曾呼吁國務院對VIE結構采取行動。

提供給投資者的一般建議似乎是謹慎前行。 Fathom China建議機構投資者展開某種盡職調查，包括核實客戶是否存在、生產設施是否處于運營之中，以及已宣布的收購是否已完成。報告稱，此外的明智之舉還包括：核實同業競爭對手對該公司有所了解，而且高管沒有訴訟糾紛。

該報告總結稱：“所有這些都可以在不掌握實質性非公開信息（這會讓美國證交會介意）的情況下得到核實。”

對于那些認為仍需要做出更多調查的投資者而言，德安華等機構提供的專業服務要價不菲。但正如何越指出的那樣，對于擁有可能200萬美元投資資金的養老基金等大型投資者而言，花一點錢就能買到德安華提供的一份詳細調查。何越表示：“2萬美元會讓你得到很多東西。如果存在影響交易的根本性因素的話，你將會嗅出這種氣味。”

不是說所有在海外或國內上市的中國企業都一定不好。正如何越所言，很多在海外上市的的中國優秀企業被“拖下了水”。

她表示：“一顆老鼠屎壞了一鍋湯。”

但對中國企業做足功課，對于潛在投資者而言，的確是一條不錯的建議。

譯者/梁艷裳