Chinese retailer Sunbridge Group Ltd (ASX: SBB) has seen its shares slammed down 10.7% today as shares hit a new low of 4.5 cents.
It seems investors may have been spooked by a recent Wall Street Journal (WSJ) article (subscription required), pointing out that US big-four auditors do not actually operate in China and licence their brand names to local Chinese affiliates. In the US, all major auditors must undergo regular inspections, but Chinese authorities prohibit local auditing affiliates from being inspected by the US Public Company Accounting Oversight Board (PCAOB).
Essentially this means that Chinese companies listed on US stock exchanges and audited by local affiliates can play by their own rules. The US Securities and Exchange Commission (SEC) decided that kicking Chinese companies off the exchanges wasn't an option – although they may have been heavily lobbied by various interest groups such as investment bankers, lawyers and accounting firms – as Paul Gillis points out on his blog.
As the WSJ notes, "tens of billions of dollars have disappeared as more than 170 US-listed Chinese companies have faced scrutiny for embezzlement, theft, misrepresentation and other alleged abuses."
The WSJ goes on, "China-based auditors have also refused to supply the SEC with their client's paperwork, citing Chinese laws that treat such corporate information as state secrets. The upshot is that investors in US markets lack basic protections against Chinese fraudsters."
This certainly casts a shadow over ASX-listed Chinese companies such as Sunbridge, Victor Group Holdings Ltd (ASX: VIG), Sino Australia Oil and Gas Ltd (ASX: SAO) and U & D Coal Ltd (ASX: UND). In fact, the latter two are already suspended with U & D allegedly failing to comply with ASX Listing Rules and Sino under investigation for alleged breaches of the Corporations Act.
Clearly in Sunbridge's case, investors don't trust the company's accounts, with shares trading below the value of the cash on the company's books. As Sunbridge doesn't make public its accounting statements for its two Chinese operating subsidiaries, one has to wonder whether the company's auditors Grant Thornton actually get to see these, or whether they face the same issues as the US.
Without that clarity, there's a question mark over the value of the company's assets, and whether it actually holds $30 million in cash – an issue we raised here. Sunbridge's decision to not pay a dividend since April 2014, and recent statement that it was instead 'investing' more than $6 million into a store renovation program further clouds the issue (among many we have raised previously) and raises the risks substantially.
Interestingly, around 40 companies listed on the Singapore Stock Exchange, many of them China-based, have traded below their net tangible assets (NTA) consistently since 2010.
Buyer beware.
