The wild ride of Sino-Forest Corp. has laid bare the hidden perils of investing in China, where sound research on many companies is hard to come by, says the head of one of the longest-running independent foreign investment firms operating in the country.
Chinese companies listed on Canadian and U.S. stock exchanges are particularly difficult to analyze, even for investors who consider themselves experts on China, said Robert Lloyd George, whose Singapore-based firm manages $6-billion of investments and is considered one of the leading Western authorities on Chinese companies.
"We don't buy the U.S. or Canadian-listed companies [in China], because unless we know them and we've been to see them, we wouldn't invest in them," Mr. Lloyd George said in an interview in Toronto recently after wrapping a week of meetings with Canadian investors.
Sino-Forest, which is based in Hong Kong but operates primarily in mainland China, was the largest publicly traded forestry company on the Toronto Stock Exchange by market value until a short seller's report in early June accused it of large-scale accounting fraud. The company set up an independent committee to investigate the allegations, the stock plunged more than 90 per cent and the firm's largest shareholder, hedge fund Paulson & Co., bailed out.
But lately the shares have been on the rebound as some new shareholders have moved in, headlined by New Zealand billionaire Richard Chandler, who bought about 15 per cent of the company, calling it "an excellent deep-value investment opportunity." The shares closed Friday at $7.30 – more than five times the low of $1.29 they hit on June 21. But they're still down more 60 per cent since the report by the short seller, Carson Block of Muddy Waters LLC.
Though the veracity of the fraud allegations will not be known until the independent committee's report is complete, Mr. Lloyd George said the situation will likely have an impact on the psyche of Canadian investors looking to buy stock in China, regardless of the outcome.
While some retail investors might see a Canadian or U.S. listing of a Chinese company as a reassurance, new questions are being cast on whether such structures can instead cloud problems.
"That is the dark side of it. You have these Chinese companies listed through backdoor listings in Canada and the U.S," Mr. Lloyd George said. "And that is bad for the image [of investing in China]. They're not all rotten, but there might be one or two that are not properly audited."
The great-grandson of the former British prime minister David Lloyd George, he began specializing in Chinese firms in the 1980s, before most of them were opened up to Western investment, and says his firm does as many as 400 company visits a year before buying shares in those firms.
His company, Lloyd George Management, was acquired by Bank of Montreal in January. The firm, which was founded in 1991, was sought by the Canadian bank in an effort to bulk up its asset management capabilities in Asia, particularly in China. Prior to starting the company, Mr. Lloyd George served as managing director of Indosuez Asia Investment Services in Hong Kong since 1984.
He said investors who work on the ground in China tend to favour locally listed companies that they can deal with directly, whether through credible Chinese investment houses or dealing in person with the founders or entrepreneurs behind the business.
"It's not always the easiest place to invest in," Mr. Lloyd George said. "We do buy a lot of Hong Kong-listed Chinese companies, but we'll visit them every few months. Our philosophy as a company has always been to be on the ground, to have our own research."
Among the allegations Sino-forest faces is that it doesn't have claim over hundreds of thousands of hectares of forestland, as it says it does. The company denies those allegations, and says its operations are misunderstood by Muddy Waters and others who have questioned its financial statements.
Most North American analysts have halted coverage of the company since the allegations arose, including Dundee Securities analyst Richard Kelertas. He initially criticized the Muddy Waters report in June as "a pile of crap," but later suspended research of Sino-Forest until the independent committee has completed its report.