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@ visit http://www.ifre.comAudit probe derails
60 China ECM deals
Equities Regulators mull higher penalties for false disclosuresBY KAREN TIAN, FIONA LAU#HINASûSECURITIESûREGULATORûHASû
suspended or terminated the
review of 60 equity capital market
deals following an investigation
into the sixth-largest accounting
lRMûINûTHEûCOUNTRY
4HEû#HINAû3ECURITIESû
2EGULATORYû#OMMISSIONûSAIDûONû
*ULYûûITûHADûPLACEDû2UIHUAû
#ERTIlEDû0UBLICû!CCOUNTANTSû
under investigation over an
ALLEGEDûlNANCIALûFRAUDûCASEûATû
KANGDE XIN COMPOSITE MATERIAL
GROUP, one of its clients.
3INCEûTHEN ûTHEû#32#ûHASûHALTEDû
WORKûONûAPPLICATIONSûFORûû)0/S û
12 convertible bond issues, nine
private placements and four
rights issues where the issuer had
WORKEDûWITHû2UIHUA ûlLINGSûANDû
company announcements
REVIEWEDûBYû)&2ûSHOW
Shenzhen-listed Kangde Xin, a
LAMINATINGûlLMûMANUFACTURER û
DEFAULTEDûONû2MBBNû
(US$218m) of short-term bills in
January even though its
lNANCIALûSTATEMENTSûSHOWEDûITû
HADû2MBBNûINûCASHûANDûBANKû
deposits four months earlier.
The regulator launched an
investigation into the company
in January and concluded in July
THATû+ANGDEû8INûHADûINmATEDûITSû
PROlTSûBYûUPûTOû2MBBNû
between 2015 and 2018.
2UIHUAûONû*ULYûûREJECTEDû
accusations of improper due
diligence in its audits of Kangde
8INû4HEûlRMûSAIDûONûITSûWEBSITEûITû
had found no abnormal items in
the accounts and believed it had
met regulatory requirements.
!TûTHEûENDûOFû*UNE û2UIHUAû
counted 316 A-share listed
companies as clients, accounting
for 8% of all listed A-share
companies. According to the
#HINESEû)NSTITUTEûOFû#ERTIlEDû0UBLICû
!CCOUNTANTS û2UIHUAûWASûTHEûSIXTH
LARGESTûACCOUNTINGûlRMûINûREVENUEû
TERMSûINû#HINAûINûûBEHINDû
0W# û$ELOITTE û%9 û,IXINûANDû+0-'
“Even if the issuer is crafty, if a
PROFESSIONALûACCOUNTINGûlRMû
cannot spot the problems, it can
only show that theirprofessionalism is not up to
standard,” said Dong Dengxin,
DIRECTORûOFûTHEû)NSTITUTEûOFû&INANCEû
and Securities at Wuhan University
of Science and Technology.
!NOTHERû2UIHUAûCLIENT û
Shanghai-listed FUREN GROUP
PHARMACEUTICAL, said on July 27
that it had received a letter from
THEû#32#ûINFORMINGûITûTHATûITûWASû
being investigated for “suspected
violation of laws” and
INCONSISTENTûlNANCIALûREPORTS
Meanwhile, the Shenzhen Stock
%XCHANGEûASKEDû2UIHUA ûASûTHEû
auditor of HAN’S LASER TECHNOLOGY
INDUSTRY GROUP, to review the
Shenzhen-listed company’s
lNANCIALûSTATEMENTûAFTERûITûFORECASTû
ONû*ULYûûTHATûITSûlRST
HALFûû
PROlTûWOULDûFALLûnûYEAR
ON
YEARû)TûHIGHLIGHTEDûTHEû
construction cost of a European
2$ûCENTRE ûWHICHûWASûESTIMATEDû
ATû2MBMûINûûBUTûSTATEDûASû
2MBBNûINûITSûLATESTûSTATEMENTTOO LENIENT
4HEû#32#ûSAIDûLASTûMONTHûTHATûITû
would seek to increase
maximum prison terms and
lNESûFORûCHEATERSûINûCAPITALû
markets as the current laws
WEREûTOOûLENIENTû)TûSAIDûITûWOULDû
severely punish negligent
auditors and investment
bankers and support
compensation claims made by
victims of crime.
Under the current securities
law, a listed company that makes
AûFALSEûDISCLOSUREûFACESûAûlNEûOFû
UPûTOû2MB û#RIMINALûLAW û
meanwhile, states that those
who conceal or intentionally
destroy accounting records can
BEûIMPRISONEDûFORûUPûTOûlVEûYEARSû
ANDûlNEDûUPûTOû2MB
“At present, the penalties for
crimes and violations from listed
companies and intermediaries are
too low,” said Dong. “But the most
IMPORTANTûPOINTûISûTHATû#HINESEû
investors do not take the initiative
to defend their own rights. As a
RESULT û#HINESEûREGULATORSûBECOMEû
the only parties to penalise the
companies and the punishmentinvolved is not strong enough.” (^)
behind it ... and now the
investment community has a
much clearer sight into their
core earnings over the next few
years,” Morningstar analyst
Travis Miller said.
h%DISONû;STOCK=ûHASûTRADEDûATûAû
discount to utilities from other
STATESûBECAUSEûOFû#ALIFORNIAû
POLICYûRISK ûBUTûTHEûWILDlREû
legislation substantially reduces
that risk.”
The timing of the offering
REmECTEDû%DISONSûNEEDûTOûCOMEû
up with the upfront contribution
by a September 10 deadline
while avoiding funding in late
August when many investors are
taking summer holidays.
“Most investors are being
quite supportive because they
VIEWûTHEûWILDlREûLEGISLATIONûTHATû
passed earlier this month as a
step in the right direction for
the future of the industry as
REGARDSûTOûWILDlREûRISKS vûAû
banker close to the deal said.
Helpfully, Edison’s stock price
hit a 52-week high of US$72.
in the previous week, having
risen about 25% this year as the
ENACTMENTûOFûTHEûWILDlREû
legislation and greater
regulatory clarity have been
welcomed by investors.
Fitch has estimated Edison’s
exposure to the 2017 and 2018
#ALIFORNIAûWILDlRESûATû53BN û
though the new fund is only for
CLAIMSûRELATEDûTOûWILDlRESûDEEMEDû
to have been caused by a utility after
the enactment of the legislation.
/NûTOPûOFûITSûUPFRONTû
contribution, Edison will have
to contribute US$95m a year to
the fund for the next decade.
0'%ûANDû3$'%ûHAVEûALSOû
NOTIlEDûTHEû#ALIFORNIAû0UBLICû
5TILITIESû#OMMISSIONûOFûTHEIRû
intent to participate in the fund,
THOUGHû0'%SûBANKRUPTCYû
lLINGûHASûCLOUDEDûITSûABILITYûTOû
do so in the near term.
3$'%SûPARENT û3EMPRAû
Energy, has a smaller footprint in
#ALIFORNIAûANDûBANKERSûSPECULATEDû
it could meet its contribution
(estimated at US$450m) from
INTERNALûSOURCES3EEû3O#AL%DûINû
Bonds section.) (^)
"ANCOû)NTERûISûBELIEVEDûTOûBEû
THEûlRSTûPUBLICûINVESTMENTûBYû
the new SoftBank fund.
DIGITAL REVOLUTION
After going public in April 2018,
"ANCOû)NTERûISûUSINGûPROCEEDSû
raised to fund its ongoing
growth.
The digital-only bank
estimates that it had about 2.5m
subscribers at June 30, up
612,000 from the same time last
year.
)TûOPENEDûMOREûTHANû û
accounts per day during the
month of June.
"ANCOû)NTERûISûAMONGûAûGROUPû
OFûNEWûOUTlTSûDISRUPTINGû
TRADITIONALûlNANCIALûSERVICESû
across Brazil with free digital
accounts.
)NûADDITIONûTOû)NTERûANDû
Nubank, Brazilian payments
provider PagSeguro in May
rolled out its digital-only bank,
PagBank.
Traditional lenders such
"ANCOû)TAUûANDû"ANCOû"RADESCOû
have countered with similar,
low-cost digital alternatives,
analysts at UBS explained in a
report on Monday.
&ROMûAûlNANCIALûSTANDPOINT û
the high valuation achieved on
)NTERSûlNANCINGûMAKESûITûAû
great outcome. From a longer-
term perspective, however, the
equity raising is not ideal from
an investor relations or liquidity
perspective, arguably making it
MOREûDIFlCULTûTOûCONTINUEûTOû
raise capital to fund continued
expansion.
MORE DESIRABLE
4HISûISûHARDLYûTHEûlRSTûTIMEû
recently that a strategic,
lNANCIALûBUYERûHASûINTERVENEDû
in a public markets
transaction.
STONECO ûAûlNANCIALûPAYMENTSû
processor, convinced Berkshire
(ATHAWAYûANDû4û2OWEû0RICEûTOû
invest US$550m combined in its
53BNû)0/ûLASTû/CTOBER ûANDû
Brazilian e-commerce darling
MERCADOLIBRE saw PayPal invest
US$750m in a private placement
alongside its US$1.15bn public
equity raising in March.
The side-by-side staple of
private placements and public
market transactions are a more
desirable structure, but take
some time to put together. (^)