Who’s responsible for badly failed IPO?

By Kim Da-ye

Kang, a healthcare worker living on the outskirts of Seoul, first heard of China Gaoxian Fibre Fabric Holdings on a business news channel. In the next couple of months, from the media and analysts’ reports, she would continue to learn the Chinese firm’s bright prospect thanks to the “Huaxing Project,” an expansion of facilities that produce premium polyester yarn and its base material.

Kang checked the company’s earnings and was satisfied with that the firm had posted profits, not losses, in the past few years.

On the morning of March 22, 2011, Kang found the price of China Gaoxian’s shares diving fast. She thought it was a good chance to buy undervalued shares with a great potential, she recalled more than a year later.

She hoarded 3,500 shares worth some 15 million won. She had saved the money as a deposit for renting a home.

Within an hour, however, the Korea Exchange put a halt on the trading of China Gaoxian’s shares. Since then, Kang’s 15 million won has been trapped with the securities that could vanish anytime with the delisting of the Chinese company from the Seoul bourse.

What Kang didn’t and couldn’t know was that China Gaoxian’s shares had already been halted from being traded a day earlier in Singapore.

China Gaoxian went public initially in Singapore Exchange, raising 83.2 million Singapore dollars (75 billion won). It became dual-listed in Korea on Jan. 25, 2011, by issuing depository receipts on the mainboard of the Korea Exchange.

In the late afternoon on March 21, 50 million shares of China Gaoxian were dumped in Singapore, causing their price to freefall 24 percent. The company requested the bourse operator to halt the trading of the shares.

On the same day, Korean institutional investors were attending China Gaoxian’s investor relations presentation in Shanghai. The information about the shares circulated rapidly among institutional investors in Seoul who sold off 1.75 million shares as soon as the Korean stock market opened at 9 a.m. the next morning.

Individual investors who had no idea about why prices were falling believed they were getting bargains.

At 10 a.m., after learning about the action by its Singapore counterpart, the Korea Exchange halted the trading of Gaoxian’s shares. During that one-hour window, individual investors had already amassed 1.77 million shares. Kang was one of them.

One year and three months have passed since the fiasco, but investors are still stuck in limbo as the shares are suspended de-facto indefinitely from being traded and China Gaoxian stays largely mum about its business plans.

Two days after the halt of the trading, China Gaoxian revealed that its auditor Ernst & Young slapped a disclaimer of opinion on a 2010 financial statement. The auditor rejected the statement because it couldn’t verify the bank balances of the company’s subsidiaries.

It was also found out that investment into the Huaxiang Project had been made without shareholders’ approval.

In June 30, Gaoxian gave further details on its bank balances investigated by PricewaterhouseCooper appointed as a “special auditor.”

The 1.1-billion-yuan (200 billion won) cash and bank balance as of Dec. 31, 2010 on the unaudited financial statement shrank to 93 million yuan while the firm’s bank liabilities ballooned from 157 million to 285 million yuan, the special auditor found.

That has been the only substantial information made available to investors.

Gaoxian remains vague about the Huaxing Project. It said that it appointed Frost and Sullivan as an independent consultant and Deloitte and Touche Corporate Finance as a finance advisor for the project. After completing a feasibility assessment, Frost and Sullivan, according to Gaoxian, said the project was an “attractive market opportunity” that “could support the company’s future growth.”

After a series of delays, the company submitted on Oct. 24, 2011 the annual report with the financial statement for 2010, which was slapped with a disclaimer of opinion by auditors.

Auditors’ rejection of a financial statement prompted the Korea Exchange to consider delisting Gaoxian, which appealed against it.

The stock exchange gave the firm a “period for improvement” which expired on March 16, 2012. The company still hasn’t come up with clear plans to improve.

In June this year, auditors again slapped the company with a disclaimer of opinion on the financial statement for 2011 in both Singapore and Korea.

According to a source familiar with the matter, the Korea Exchange should have kicked out Gaoxian from the bourse a long time ago, but is looking for the right time.

Gaoxian has asked the Singapore Exchange to resume trading its shares and will have to make a sound argument for it by July 25.

The exchange whose regulations are more generous than those of its Korean counterpart may let the shares to be traded again. In such a case, the Korea Exchange is likely to delist the company so that shareholders can convert their depository receipts into shares listed on the Singapore Exchange and minimize losses.



Frozen IPO market

While individual shareholders of China Gaoxian have suffered the most from the fiasco, other Chinese firms listed on the Seoul bourse became increasingly shunned by investors and the IPOs of foreign companies on the Korean stock market nearly dried up.

Since the suspension on China Gaoxian’s shares, synthetic leather maker United Technology and solar energy company Shenglong PV-tech Investment have faced similar fates.

After their annual reports were rejected by auditors, United and Shenglong were given the time for getting into shape until late July and mid August, respectively. Without improvement, they could be out from the stock market.

Each time a Chinese company was found for irregularities, shares of all Chinese firms categorized within the segment were hit hard.

Poor performance of their stocks have not only discouraged the companies ― China Food Packaging decided earlier this month to close its office in Korea for scanty efficiency ― but also those that hoped to enter the Korean stock market.

Fast Future Brands, dubbed here as the Australian Zara, cancelled its initial public offering (IPO) on the main board that was scheduled for July 4. There weren’t enough demands from institutional investors to meet the range of the IPO prices the Australian firm hoped.

Since 2011, five companies ― four Chinese and one Japanese ― gave up going public in the KOSDAQ market even after their applications were approved.

Thorny path to globalization

If delisted, China Gaoxian will be remembered as a grand failure of the Korean capital market’s desperate efforts to globalize.

The listing of China Gaoxian was apparently part of the Korea Exchange’s ambitious venture to host international blue-chip companies.

Because global companies wouldn’t greatly hope to go public in Korea at this early stage of such campaigns, the exchange came up with a strategy to encourage dual-listing.

The listing of China Gaoxian on the Singapore Exchange’s mainboard clearly led to the blinded and hasty decision of KDB Daewoo Securities and the Korea Exchange to let the firm raise a lot more capital here than it did in Singapore, observers point out.

KDB Daewoo Securities couldn’t make official comments on the issue because the lawsuit brought by more than 500 shareholders against the brokerage house, the Korea Exchange and the Korean branch of Ernst & Young is ongoing.

The global IPO market is a fiercely competitive place where stock exchanges fight to win big shots and geographic borders became insignificant.

Italian designer brand Prada had its IPO in Hong Kong while English football club Manchester United may ditch listing in Singapore for the U.S.

Time to end trauma

China Gaoxian appointed last year a Korean as a nonexecutive director to improve its relations with investors here.

That, however, changed little.

The firm’s website shows IRKUDOS, a Korean agency that carries out IR activities on behalf of overseas clients, as its investor relations contact. A call to IRKUDOS found that the agency no longer represents China Gaoxian because the firm wouldn’t communicate its business activities and plans after the suspension.

Amid persisting uncertainties over the company’s future, investors seek answers to who’s responsible for the ridiculous case of a firm getting involved in accounting irregularities in two months after dual listing.

Lee, a 69-year-old retiree, subscribed to 20,000 shares of China Gaoxian worth 140 million won at the firm’s IPO.

A representative of Daewoo Securities called him, introducing the company as one free from “China discounts” because it is listed in Singapore, he recalled. Lee said that in the past 15 years, he had invested in IPOs only.

The retiree sold half of the shares several days before March 22 at the recommendation of an advisor at Hyundai Securities, and the other half remains trapped.

While concerned about the fate of his retirement nest egg, he wants the culprits to be held accountable.

“Nobody has taken responsibility so far. The responsible parties will have to be subjects to criminal punishment. There shouldn’t be the second and third China Gaoxian in the future,” Lee said.