In November, the AP report cited discrepancies in the tax records and customer relationships of Tianhe Chemicals Group Ltd. Hong Kong regulators suspended trading in Tianhe (pronounced TYEN’-huh) four months after concerns by auditor Deloitte Touche Tohmatsu Ltd. prevented the company from releasing its 2014 financial report.
The concerns surrounding Tianhe highlight the risks of investments in mainland China firms that existed before the recent plunges in the Chinese stock market and may still exist. Even basic details of companies’ operations are sometimes challenged, and in the event of trouble foreign investors have little recourse. In both Hong Kong and the United States, regulators are heavily dependent on investment banks to vet companies that want to sell their shares to the public.
Deloitte Touche resigned after Tianhe’s board refused to accept an auditor disclaimer saying that Deloitte did not stand behind the accuracy of Tianhe’s financials. Tianhe said it will seek a new auditor to approve its financials. But auditor departures after disagreements have often preceded significant financial restatements or corporate failures.
Most of the $300 million invested in Tianhe by Morgan Stanley‘s Asian private equity arm came from pension funds, educational institutions and philanthropic endowments such as an organization funding public health and education in Appalachia. Morgan put little of its own money at risk, but continued woes for Tianhe would pose other perils for the bank.
Morgan Stanley said it had conducted millions of dollars’ worth of due diligence before investing other people’s money in Tianhe, and it put a managing director, Homer Sun, on the company’s board. Morgan Stanley took the company public on the Hong Kong Stock Exchange in June of last year, and its analysts recommended the stock.
Should Tianhe’s troubles persist, Morgan Stanley‘s sponsorship of the company’s initial public offering — one of Hong Kong’s largest in 2014 — could prove more than embarrassing. After years of questioning whether investment banks were sufficiently vetting the companies they sold to the public, Hong Kong regulators pledged to crack down last year.
Morgan Stanley did not respond to phone or email messages from the AP. Deloitte also did not respond to a phone message and email.
The AP investigation found that Tianhe’s research budget was unusually low for a high-tech chemical manufacturer, and versions of its finances available through domestic Chinese business data providers contradicted figures in its prospectus. Key Tianhe customers did not appear to have the financial capacity to buy the expensive products that Tianhe reported selling. Additionally, the AP found that Tianhe’s predecessor company was owned by the Chinese government, even though the company’s founders had told investors they long owned it.
Other companies in Morgan Stanley‘s Asian private equity portfolio have had also trouble. Two previously failed amid allegations of fraud. And earlier this month, a Morgan Stanley investment called Sihuan Pharmaceutical Holdings Group Ltd. Announced it will hire a forensic investigator after its auditor, PriceWaterhouseCoopers LLC, disclaimed its 2014 financials. Homer Sun sits on the board of Sihuan as well.
Deloitte Resigns As Auditor For Tianhe Chemicals
Deloitte Touche Tohmatsu Ltd has resigned as an auditor for Tianhe Chemicals, as the chemical company faces serious criticism from Anonymous Analytics. This story was initially reported by ValueWalk in October of last year.
Morgan Stanley (NYSE:MS) was one of the lead banks on Tianhe’s IPO, which turned out to be one of Hong Kong’s largest in 2014, and defended the company in recent sell-side reports.
Deloitte resigned after Tianhe’s board refused to accept disclaimer
Last September, Anonymous Analytics released a Strong Sell on Tianhe, noting in an email to ValueWalk the ‘biggest fraud since Sino-Forest’. Anonymous Analytics indicated that it’s hard to imagine that three years after the fall of Sino-Forest, a fraud twice its size could navigate through a sea of regulators, investment bankers and auditors to list on a global stock exchange.
Tianhe, the Hong Kong-listed company which counts Morgan Stanley’s private-equity arm among its investors, has repeatedly denied the Anonymous allegations, calling them false and groundless. Morgan Stanley was one of the lead banks on Tianhe’s IPO.In its statement published Thursday, Tianhe Chemicals said on September 15, 2015, after due consideration, the chemical company’s Audit Committee made the recommendation to its board not to accept the Draft Report from Deloitte in light of a wide range of work performed and inter-locking confirmations received from various independent third parties. The statement further added that Tianhe’s Board has also unanimously concluded not to accept the Draft Report for incorporation in the Company’s audited consolidated financial statements and informed Deloitte on September 15, 2015.
Following the above developments, Deloitte is of the view that for all practical purposes, the audit has come to an end. Deloitte has also given a formal notice of resignation as auditor to Tianhe’s Board and the Audit Committee on Wednesday. The chemical company indicated that it will try to find a new auditor.
Tianhe’s shares halted since March
In June of last year, Tianhe went public in Hong Kong in a $748 million initial public offering. A few months later, the chemical company faced criticism from the group Anonymous Analytics. Trading in Tianhe’s shares has been halted at the company’s request since March. The chemical company at the time said it needed more time to provide further information to its auditors concerning its 2014 annual results, which haven’t been released.
Morgan Stanley, an early investor in Tianhe through a private-equity unit, owns a stake of about 8.9% in the company and is the second-largest shareholder after the Wei family, according to filings. Most of the $300 million invested in Tianhe by Morgan Stanley’s Asian private equity arm came from pension funds, educational institutions and philanthropic endowments such as an organization funding public health and education in Appalachia.
Interestingly, earlier this month, a Morgan Stanley investment called Sinhuan Pharmaceutical Holdings Group Ltd. announced it will hire a forensic investigator after its auditor, PriceWaterhouseCoopers LLC, disclaimed its 2014 financials.