Posted by YEO Wei Lin, Year 3 undergrad at the School of Accountancy, Singapore Management University
(Reuters) – Tianhe Chemicals (1619.HK) has denied allegations that it made false statements in its initial public offering prospectus and said key investor Morgan Stanley Private Equity Asia (MSPEA) has given it full support.
A report by Anonymous Analytics, which describes itself as a “faction” of the hacker group Anonymous, accused the Chinese chemicals company of conducting “one of the largest stock market frauds ever conceived,” based on analyses of different company reports, tax statements, market analysis and visits to customers mentioned in Tianhe filings.It also accused Tianhe of giving its auditor Deloitte forged documentation prior to its IPO in Hong Kong in June, an allegation Tianhe denied in a statement on Wednesday.
Deloitte declined to comment when contacted by Reuters, referring Reuters to Tianhe’s statement.
Tianhe’s share price fell 5 percent in just a few hours on Sept 2, after the Anonymous report was published. Tianhe management requested a trading halt, while Goldman Sachs and UBS suspended their ratings on the stock.
The cost of borrowing shortable shares in Tianhe, which had a market cap of just under $8 billion before the trading halt, has risen since the freeze, indicating the report has gained some market traction.
Tianhe said it “unequivocally denies and vigorously refutes the groundless allegations in the report” but added that trading in its shares will remain suspended while it addresses queries from the Hong Kong stock exchange.
“Resumption of trading of the shares may only take place when all relevant information has been provided to the stock exchange and properly disclosed.”
It also said that its e-mail system had been hacked.
“As a result, there is an imminent risk of leakage of such communications which may result in further market rumours.”
Tianhe said the Anonymous report contained falsified information and a forged signature of the company’s chairman.
Anonymous Analytics rejected Tianhe’s report in an e-mailed response to questions from Reuters.
“Despite having over a week to prepare, the main response the company is left with are false accusations of forgery. This further increases our confidence that the end is near for Tianhe.”
Anonymous said it had no knowledge of any hacking of Tianhe’s e-mail.
Tianhe’s statement quoted Homer Sun, chief investment officer and head of China for MSPEA and a non-executive director at Tianhe, saying that MSPEA supports Tianhe.
“We stand resolutely behind Tianhe’s world class management team,” the statement quoted Sun as saying. MSPEA confirmed the authenticity of Sun’s comments, but declined to comment further.
MSPEA has put more into Tianhe than any other single equity investment in Asia, investing around $300 million in the Liaoning-based chemicals manufacturer in 2012, while Morgan Stanley’s investment banking division sponsored its IPO.
Tianhe’s rebuttal also suggested that major investors would buttress Tianhe’s share price in case of shorting pressure.
“The controlling shareholders of the company would also consider conducting on-market purchases of the shares in the event of disorderly market trading of the shares.”
That support, in the context of a wider stock market rally in Hong Kong, could squeeze many short-sellers, regardless of the accuracy of the allegations.
MSPEA declined comment on whether it would support the stock, but it has previously acted to back an investment when the company came under short-seller attack.
In 2011, at the height of a short-selling frenzy targeting U.S.-listed China companies, MSPEA invested $50 million in fertilizer company Yongye International, which had been accused of fraud by short-sellers.
Yongye’s stock subsequently soared around 40 percent in one day. It then fell back, but the accusations faded. In July this year, MSPEA was part of a consortium that bought out the company.
Tianhe’s rebuttal was a detailed line-by-line refutation of Anonymous Analytics 67-page report, dealing in complex issues involving taxation, different accounting standards, and the market for Tianhe’s flagship “anti-mar” product.
Reuters was unable to independently verify or disprove any of the allegations. Due diligence experts who spoke to Reuters were divided on how to interpret the significance of Anonymous’s allegations.
A source with knowledge of the matter previously told Reuters that MSPEA spent over $2 million conducting due diligence on Tianhe before investing.
(Additional reporting by Vikram Subhedar in LONDON; Editing by Raju Gopalakrishnan)