Chinese stocks in Canada dragged down by Sino-Forest plunge

The 75 percent decline in Sino- Forest Corp., the timber company targeted by short seller Carson Block, has dragged other Chinese companies trading in Canada to the biggest monthly decline in almost three years.

An index of Canadian shares of China-focused companies, excluding Sino-Forest, has fallen 15 percent this month, four times more than the decline in the Standard & Poor?s/TSX Composite Index. Companies as diverse as Silvercorp Metals Inc., Asia Bio-Chem Group Corp. and GLG Life Tech Corp., an artificial-sweetener maker, have plunged at least 19 percent since Block said Sino-Forest manipulated financial data.

?People got very emotional and started to dump everything related to China,? said Rui Feng, chairman and chief executive officer of Silvercorp, which mines in Henan Province.

Sino-Forest, which produces forest products, has tumbled since June 1, the day before Block?s Muddy Waters LLC said its stated timber holdings don?t match Chinese city records. The company has denied the assertions and published documents it says back up its financial disclosures. Sino-Forest, based in Hong Kong and Mississauga, Ontario, is scheduled to release first-quarter results tomorrow.

The index of 50 other Chinese companies trading in Canada, based on a list provided by TMX Group Inc., has plunged nine times as much as the Shanghai Stock Exchange Composite Index from June 1 through June 10. TMX, owner of the Toronto Stock Exchange, defined Chinese companies as those with most of their operations and management in China, according to Carolyn Quick, a TMX spokeswoman. Most of the companies listed in Canada after 2005.

Sino-Forest shares rose 5.8 percent to $4.76 at 9:42 a.m. in Toronto. The China-focused index fell 1.4 percent.

Migao Drops

Fertilizer producer Migao Corp., the biggest company in the index by revenue, decreased 22 percent in the week after Block released his report and has retreated another 20 percent since reporting earnings that missed the average analyst estimate on June 9. Migao has an office in Toronto. Vancouver-based Silvercorp has plunged 20 percent from June 1 through June 10, nearly twice as much as an index of S&P/TSX producers of precious metals other than gold.

The Sino-Forest plunge has shaken the confidence of investors who thought any company that trades on the TSX has solid accounting standards, said Marcus Xu, a money manager at Genus Capital Management in Vancouver, which oversees $1.7 billion ($1.74 billion).

?It freaked people out,? said Xu, who was born in Beijing and regularly travels to China. ?They got shell-shocked.?

?Bad Guys?

Carson?s criticism of Sino-Forest has given Western investors a false impression that Chinese taxation and accounting practices are always shady, Feng said.

?I think there are a lot of bad guys in China, but China?s like 1.5 billion people,? he said by telephone from his Vancouver office.

Arthur Salzer, a money manager at MacNicol & Associates Asset Management Inc. in Toronto, said the sell-off in companies that do business in China is rational, since the Muddy Waters report reminded investors of the prevalence of fraud in the country.

?I don?t believe the underwriters or the auditors truly understand the companies they?re reviewing,? said Salzer, whose firm manages about $300 million, including shares of Chinese issuers. ?I wouldn?t sell all my companies, but before you buy a company operating in China, due diligence above and beyond what you would perform on a Western company is needed.?

Application Rejection

Last week, the U.S. Public Company Accounting Oversight Board rejected Hong Kong-based Zhonglei CPA Co.?s application to register as an auditor in the U.S., saying Chinese authorities make it too difficult to inspect audit work by accounting firms there.

In March and April, more than 24 China-based companies disclosed auditor resignations or accounting problems to the U.S. Securities and Exchange Commission, the commission?s chairman, Mary Schapiro, wrote to Congress on April 27.

Sino-Forest?s Impact

The impact of Sino-Forest on other China-centric stocks will be short lived as investors realize companies like China Gold International Resources Corp. are legitimate, said Frank Lagiglia, a Vancouver-based spokesman for the company, which mines in China?s Inner Mongolia region.

?When the Sino-Forest thing hit, there?s going to be a bit of an overhang, and that brings out the short sellers. They?re going to take their shot at Chinese companies,? Lagiglia said. ?They?re going to get pinched.?

In short selling, traders sell borrowed stock in the hope of buying it back at a lower price. The percentage of China Gold shares sold short as surged to 3.7 percent on June 8 from 0.8 percent on June 1, according to Data Explorers, a New York-based research firm.

Xu said he hasn?t sold any shares of Chinese companies this month and other investors shouldn?t either. The long-term positives of investing in the world?s fastest-growing major economy outweigh the short-term hurdles, he said.

?You have to look at things on a case-by-case basis. You shouldn?t Whac-a-Mole,? he said. ?If you believe in the China story, you can?t panic.?

? Copyright (c) The Vancouver Sun

Source: http://feeds.canada.com/~r/canwest/F7477/~3/E19zVl_RlQU/story.html

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