New York, NY – ChinaCast Education Corporation (NASDAQ: CAST), a post-secondary education and e-learning services provider in China, recently received its second notice from NASDAQ of the exchange’s intent to delist the company for failure to make quarterly and annual filings on a timely basis. ChinaCast is the latest in a wave of Chinese companies that have been delisted from North American exchanges for alleged fraud or other improprieties in the past eighteen months. This trend has prompted many foreign investors to turn bearish on Chinese companies. In response, many Chinese companies listed in the US have considered taking themselves private.
Last week, ChinaCast announced that it had received a notification from NASDAQ that it had determined that ChinaCast’s failure to file its 10-Q for the quarterly period ended March 31, 2012 on a timely basis serves as an additional reason the Company’s securities will be delisted from NASDAQ. This follows the NASDAQ’s decision on May 2nd to delist the Company’s securities in connection with the ChinaCast’s failure to file its 10-K for the year ended December 31, 2011, as required by NASDAQ Listing Rule 5250(c).
This is the latest in a series of scandals which have plagued ChinaCast this year. In March, Ron Chan, the CEO of ChinaCast was ousted in a battle for shareholder control. Fir Tree Partners, a $7.0 bln US hedge fund, succeeded in obtaining control of the ChinaCast board and replacing Chan as CEO.
Unfortunately, on April 19th the new management team discovered that all company seals and authorized signatures for its Chinese subsidiaries (also called “chops”) were missing. Under Chinese law, the chops are necessary to enter into new contracts, conduct banking business and take official corporate action. Chan is believed to have taken possession of the items but is claiming no knowledge of the matter.
At approximately the same time, ChinaCast disclosed in their 8-k filing that an investigation was underway regarding whether questionable activities involving current and former employees had taken place. The company explains that it will pursue relevant civil and criminal legal remedies if necessary.
Delistings Accelerate in 2011
ChinaCast is merely the latest in a series of Chinese companies which has been delisted from a North American exchange for concerns about their operations. Share prices of US-listed Chinese companies plunged in 2011 due to allegations of accounting fraud at some Chinese companies listed overseas, and based on concerns that China’s growth could slow.
One well known Chinese company, Sino-Forest, was suspended by Canadian regulators after being accused by short seller Muddy Waters of accounting fraud, which the company denied. The USX China Index, which tracks US-listed companies that derive most of their revenue from China, fell 27% in 2011.
A number of the other Chinese companies were alleged to be involved in fraud or some other type of scandal, and were eventually delisted. Some of these firms include:
- DuoYuan Global Water
- China MediaExpress
- RINO International
- Focus Media Holdings
- Boshiwa International
- Longtop Financial
By the end of 2011, trading in Chinese stocks had slowed to a trickle. About 65% of U.S. listed Chinese companies saw average daily transaction volumes in their stocks fall to less than 100,000 shares. Some small companies have even found it impossible to raise capital for stock market-related costs.
Privatizations Are Answer for Some
Strangely, some management teams have viewed the 60% to 70% plunge in their companies’ share price as an opportunity to buy out their companies, with private equity backing, for the purpose of eventually relisting them in Hong Kong or mainland China where companies typically command higher valuations than in the US.
In fact, Chinese companies with a combined equity value of $3.5 bn were taken private in 2011 by management, strategic buyers and private equity groups, according to data compiled by Roth Capital Partners. An additional $4.3 bn in potential deals remain in progress.
As of mid-January, almost 10% of the 230 Chinese companies with stock traded on the New York or NASDAQ exchanges had announced privatization plans. At least 8 companies had completed the process.
One of the most high-profile privatization deals has been the $750 mln buy-out of Harbin Electric, an electric motor maker, by its chief executive, backed by Abax Global Capital, a Hong Kong-based fund. The company had been accused of fraud by a short seller, which it denied. The company’s NASDAQ listed stock fell below $6 before shareholders accepted the buyout offer of $24 a share.
Impact on Research Firms
This trend of Chinese companies either being forcibly delisted in North America or deciding to take their firms private has contributed to a tremendous loss of confidence by investors – particularly as many of these companies have been forced into action by allegations of financial fraud or other misconduct. This, in turn has had a rather negative impact on certain segments of the research industry.
One obvious segment of the industry which has seen their business slow as a result of the scandals with Chinese companies has been expert networks. While the expert network business has clearly been impacted by the US insider trading investigation, a number of firms experienced strong demand for consultations with Chinese experts last year. However, growing bearishness by US investors in regards to Chinese companies, and the move by many Chinese companies to take themselves private, has led many investors to reduce their interest in researching Chinese stocks. This has clearly been felt by expert networks.
However, we wonder if other segments of the research industry might not also be feeling the pinch from increased delistings and privatizations of Chinese companies? Obviously, independent research firms that have focused on conducting either long or short research on US listed Chinese companies might also be hurt as the number of companies available to cover has fallen, and as some US investors choose to avoid the sector altogether.
Please write and let us know if your research firm, or other research firms you know, has been impacted by increased delistings and privatizations of Chinese companies. We will keep our eye on this developing topic.