China Life IPO Under Informal SEC Investigation
The China Life IPO, which took place last December, is
under informal SEC investigation, according to a front
page story in today's Financial Times. The main issue
is corporate governance, and irregularities involving
5.4 billion yuan (US$652 million yuan) revealed by China's
National Audit Office two months after the December 2003
IPO. The Chinese National Audit Office will issue a report
soon following its own internal investigation.
China Life has already been hit by a series of lawsuits
related to the IPO. The company has strenuously denied
the charges, saying that the alleged fraud has nothing
to do with the listed company, and is an issue related
to the parent company.
Chinese premier Wen Jiabao has gambled a significant
part of his political capital on helping many Chinese
state-owned enterprises to come to successful listings
in New York and Hong Kong. He has run into considerable
resistance in China from management resisting change,
and from the public for the use of public money for bailouts.
Since the end of last year, new Chinese companies have
fared comparatively poorly, with most companies trading
below their IPO price.
Here, a few words of guidance are needed.
If I were a restaurant critic, how would I approach this
matter?
Most likely, I would check out what restaurants were
most popular with the locals, and check out those places
to try their most popular dishes. Then I would talk to
the owner, the chef, and write up my review. If a restaurant
is popular with the locals, then that would give the restaurant
a good head start.
Now, how much importance would I attach to the restaurant's
menu? It would be useful as a reference. But, there are
many good restaurants, especially smaller ones, which
don't have menus at all. And there are plenty of bad restaurants
which have very impressive ones. So, a menu at best, is
a useful reference, and at worst, it's a work of fiction.
Often, there is no relationship between the menu and the
food which comes out of the kitchen.
Financial statements are menus, and they can be useful
references, or works of fiction. Judging a company only
by its financials is not the way to go in China. (I would
go so far as to say that judging a company solely on its
financials is not the way to go anywhere.)
This is business reality in China.
You need to talk to the company people on the ground,
then their customers, and get a feel for their business.
If you don't know and speak the language, find someone
you trust who does. Be prepared to spend a long time digging
around and understanding the facts on the ground. Get
a feel for the company and the market.
Be aware that China and Chinese companies have their
own set of unwritten business rules which they have used
and apply.
It's up to you to understand them.
When it comes to China, there aren't any shortcuts.
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