The Forgotten Risks – Investing in US-listed Chinese Company
by Chariot Tan | 28 July 2021 | 15 mins read
On 28th July 2021
- – DiDi Global Inc -43.14%
- – TAL Education Group -77.51%
- – Alibaba Group -18.60%
- – JD.Com Inc -16.01%
- – Pinduoduo Inc -36.33%
Massive selloff in Chinese stocks could spell the end of new listing and existing Chinese companies in the US.
A publicly listed company as the name suggests is a company that is traded and owned publicly. By law, public companies must be audited each year by independent auditors with the U.S. Generally Accepted Accounting Principles (GAAP) or IFRS. This process gives public investors confidence and is fundamental in any investment process.
As an investor one of the worst things that could happen is fraud – remember Enron and WorldCom accounting scandals? Because of that, the Sarbanes-Oxley Act was born and the Public Company Accounting Oversight Board (PCAOB) was created to serve as the industry’s watchman, auditing the auditors.
Currently, Chinese companies listed in the US have skirted around this provision and do not get their audits audited – a failing as much as a mockery. It was only last year that the Trump administration passed a law that gave US-listed Chinese companies 3 years to comply just like everybody else or be delisted.
What would happen and should you be worried?
Yes, you should because book cooking is well documented in China according to data discrepancies submitted to state agencies:
“We document that more than half of a sample of 467 private, Chinese technology companies engage in fraudulent financial reporting. By comparing the financial statements companies concurrently submitted to two different state agencies, we demonstrate a systematic gap in reported profit figures in the two sets of books.”
Full research here: http://faculty.haas.berkeley.edu
Interpretation from the State
As a Chinese myself, it is understood that official communication from the State is done through insinuations and the recent actions of the CCP hammering on US-listed Chinese companies is unambiguous. Since the chance of opening their books to US regulators is unlikely, the likely outcome is to re-list in Hong Kong or elsewhere.
Of course, a second option is still possible – US regulators bending the knee and allowing the “China Special” to continue.
What happens during delisting?
It’s messy and the delisted company is likely to make an offer on their outstanding shares, take it private and relist elsewhere. Doesn’t sound too bad right? Wait, here’s the kicker – since most of the shares (US-listed CN co) are American Depository Receipts (ADRs) and ADR holders are not direct shareholders of the issuer, investors generally do not have the right to vote the shares underlying their ADRs which means investors will have no say if the company were to lowball their tender offer.
What is the course of action?
Fortunately, we are at the early stages and it will take another year for the potential scenarios to play out. That said, re-evaluate your positions and your exposures. Take into serious consideration the risks of delisting and default back to Warren Buffet’s Rule No. 1 “Never Lose Money”.
Article by Chariot Tan
Chariot Tan is a dynamic and visionary leader who enjoys building infrastructures, systems, teams and environments where people can achieve their best. He has transformed both profit and non-profit organizations from ground zero into multi-million dollar enterprises.
DISCLAIMER: The contents including images, videos, audio and written texts found on the author’s social media page and other platforms does not constitute a research report and it does not have regard to the specific investment objectives, financial situation and particular needs of any specific recipient of this message. All material and content are strictly for informational purposes only. The contents posted should not constitute financial or investment advice and should not be considered as an offer, or solicitation, to deal in any of the securities or investment instruments mentioned in this message. The author may, from time to time, own or have positions in any of the securities mentioned or referred to in his content or any securities related thereto and may from time to time add to or dispose of or may be materially interested in any such securities. All thoughts are the author’s own.
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