Several large Chinese operations have listed on the ASX across the past five years, usually with impressive financials and promises of strong, consistent, future growth. These companies have always been attractively priced and always seemed to report extremely well.
What was the problem?
Well, put simply, some of these companies may not exist at all, or if they did, their Australian investors often had no way of confirming this.
A number of these companies have now been completely delisted from the ASX, rendering the investments of many Australians worthless; these Australian investors usually have no means of recourse on their investment.
Not all ASX-listed Chinese companies have had these issues, after all, there remain around 20 still listed on our Bourse, many of which are performing. However, the frequency of issues in Chinese operating, Australian-listed stocks appears to be abnormal.
Often these stocks will seek to legitimise their listings by appointing well-know Australian figures to their board. This was the case for China Dairy Corporation and Bojun Agriculture, who both appointed former leader of the New South Wales National Party, Andrew Stoner, to their boards.
This was also the case for Eagle Health Holdings and Winha Commerce and Trade, who each appointed former Federal Sports and Tourism Minister, Andrew Thomson, to their boards.
China Dairy, Bojun Agriculture, Winha Commerce and Trade, and Eagle Health have now all been either suspended or delisted from the Australian securities exchange, as have several more Chinese based, ASX listed firms.
Even when the company was created in Australia, with operations all around the world, Chinese operations can still present a problem. This was the case for water-treatment company Phoslock Environmental Technologies, who uncovered accounting irregularities in their Chinese division. Phoslock’s Chinese division was engaged in fraud that the Australian Financial Review described as ‘truly spectacular’, and the company has been suspended from trading on the ASX since September last year.
Phoslock will likely resume trading on the ASX because they are an Australian based company with operations outside of China, but the Chinese issues have no doubt done massive damage to the company’s financials and will also likely do massive damage to the market capitalisation should trading resume.
This story has been repeated outside of China as well, with some US listings of Chinese companies meeting a similar fate. The fraud perpetrated here was highlighted by the 2017 documentary The China Hustle, which famously showed US investors heading to China to discover that some of the listed companies were engaged in massive fraud or simply did not exist.
It is worth reiterating that there are Chinese companies listed of foreign bourses that are entirely legitimate. However, given the frequency of issues with Chinese foreign listings in the past, it pays to be extremely diligent if considering such an investment.
If you’d like to discuss the Australian market or any ASX listed stock further, please contact an Emerald Advisor on 03 8080 5788.
Sam Green is the Portfolio Manager at Emerald Financial, whilst also being an Equities and Derivatives expert for his clients at TradersCircle.
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