Carson Block, the short seller who
last year alleged fraud at Sino-Forest Corp. (TRE), said he’s
considering investing in Chinese companies that trade on U.S.
stock exchanges.
“We are very much looking for U.S.-listed Chinese
companies with which we can go long,” Block said yesterday in
an interview with Bloomberg Television’s Erik Schatzker. “I
really hope they turn out to be companies that we feel have done
things right.”
Sino-Forest is among Chinese companies trading in North
America that Block and other short sellers accused of financial
irregularities in 2011. Sino-Forest, a timber producer, dropped
74 percent in Toronto after Block’s Muddy Waters LLC research
firm said in June that it had exaggerated its assets. The shares
were suspended in August. Sino-Forest, under investigation by
the Ontario Securities Commission and the Royal Canadian Mounted
Police, denies the allegations.
“We’re looking at companies in areas that China does well,
that take advantage of the cost disparities of production or
delivering of services between developed markets and China,”
Block said.
Institutional investors in North America should avoid
buying U.S.-listed Chinese stocks unless they have the internal
resources to “really check the company out,” Block said.
Chinese stocks trading in the U.S. have faced investor
scrutiny in the past year after companies such as China
MediaExpress Holdings Inc. (CCME) disclosed financial irregularities or
auditor resignations. Muddy Waters fueled the speculation with
reports on Rino International Corp. and Focus Media Holding Ltd.
Reverse Takeovers
“U.S.-traded China stocks were punished badly by all these
scams but the fact they are traded in the U.S. requires more
compliance and transparency than domestic shares,” Didier Duret, chief investment officer at ABN Amro Private Banking,
said in an interview in Singapore. “You don’t stop the game
because you have some scam. What will count is really the
contribution of China to world growth. It’s about growth.”
China’s economy has expanded at an average pace of 10.3
percent annually over the last decade, data compiled by
Bloomberg show. Growth slowed to 9.1 percent in the three months
ended Sept. 30 from 9.5 percent in the previous quarter as
shipments to Europe, China’s biggest export market, slumped.
The U.S. Securities and Exchange Commission began an
investigation in 2010 into the use of reverse takeovers, in
which a closely held firm acquires one that’s publicly traded,
enabling it to sell shares without the regulatory and investor
examination of an initial public offering.
‘Scratched the Surface’
China MediaExpress, which began trading in the U.S.
following a 2009 reverse takeover, fell 99.9 percent last year
amid allegations it manipulated financial statements. Its Chief
Financial Officer Jacky Lam and auditor Deloitte Touche Tohmatsu
resigned in March.
The Bloomberg Chinese Reverse Mergers Index (CHINARTO), which tracks
73 China-based companies that trade on U.S. exchanges following
reverse takeovers, has rebounded 12 percent this year after
plunging 62 percent in 2011.
“We’ve just scratched the surface of some of the problems
among Chinese companies that listed in the U.S. via IPOs,”
Block said.
To contact the reporters on this story:
Christopher Donville in Vancouver at
cjdonville@bloomberg.net;
Erik Schatzker in New York at
eschatzker@bloomberg.net
To contact the editor responsible for this story:
Simon Casey at
scasey4@bloomberg.net