List of ‘red flagged’ firms includes NYSE-listed LDK Solar

By Chris Oliver, MarketWatch

HONG KONG (MarketWatch) — Moody’s Investors Service on Tuesday identified “red flags” involving accounting, governance and other issues at several Chinese companies, with the report sparking a record share-price drop in one company mentioned and big declines in several others.

Moody’s said it had undertaken a screen of 61 non-financial Chinese companies — whether listed in China or abroad — in response to investor concerns and to “provide transparency on our approach to ratings.”

The screen looked at five areas that “highlight issues meriting scrutiny to identify possible governance or accounting risks,” Moody’s said in the report, written by analysts headed by Elizabeth Allen in Hong Kong.

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These included weakness in corporate governance, risky or opaque business models, poor quality of earnings or cash flow, concerns over auditors or financial statements, and business strategies geared towards fast growth.

“In recent weeks, a variety of participants in the market, including the U.S. Securities and Exchange Commission, are looking into potential problems with the quality of financial reporting from publicly listed Chinese companies,” Moody’s said.

Moody’s said that, as a group, Chinese property companies tended to rank lower than other non-financial companies. On the other hand, some of the worst “negative outliers” were found outside of property development.

Among these, West China Cement Ltd.

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had 12 flags, the most in the study. Its Hong Kong stock tumbled 9.5%, its largest drop on record, according to Bloomberg.

Winsway Coking Coal Holdings Ltd.

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had 11 flags, metals miner Hidili Industry International Development Ltd.

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had nine flags, and China Lumena New Materials Corp.

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, had 10 flags. All were down more than 5% in late Tuesday trading.

The fifth of the “negative outliers” listed in Hong Kong — real-estate group Longfor Properties Co.

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— received 7 flags, the most of any property company. Its shares were down 10.5%.

The sell-off in the flagged companies came amid heavy selling in the broader market, but the drops still outpaced a 1.9% fall in the benchmark Hang Seng Index

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LDK Solar

The list of flagged companies also included LDK Solar Co.

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which trades on the New York Stock Exchange and received 9 red flags.

Moody’s cited wild swings in input costs as the reason for the flags, citing “the past few years’ volatility in the solar-power industry’s prices for polysilicon raw materials and profitability.”

However, the ratings agency said that in LDK’s case, the volatility was “in line with the industry’s recent trends and, thus, not a cause for concern.”

Moody’s was careful to draw a line between the report and its credit ratings, saying that the ratings are done separately and that the “tripping of many red flags does not represent an immediate rating concern.”

Cantor Fitzgerald analysts picked up on this theme, saying in a note Tuesday that the warnings were short of credit downgrades.

But Cantor Fitzgerald added that “markets should demand higher credit premium and lower stock valuation for companies receiving such ‘red flags’ in compensation for these risks.”

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