Investors Fear Latest China Woes In Longtop Financial
May 18 2011 - 3:14PM
Dow Jones News
Little-known Longtop Financial Technologies Ltd. (LFT) may be
the halted Chinese stock that U.S. markets can't shrug off.
The New York Stock Exchange stopped trading in the software
company's American depositary receipts Tuesday, and investors were
still in limbo more than 24 hours later. The exchange cited "news
pending" as the reason for the halt. Longtop, like a dozen or more
recently halted Chinese stocks, has been battling accusations of
fraud and mismanagement.
Investors fear that the company is the latest and most
significant in a string of prolonged halts of Chinese stocks that
trade in the U.S. But unlike the small stocks where trading was
previously halted, investors have more than $1 billion tied up in
the company's ADRs.
Longtop could not be reached Tuesday or Wednesday, and an NYSE
spokesman declined to comment.
"Most foreign investors in China have realized that this has
been a problem for a very long time," said Foxhall Capital
Management Chief Executive Paul Dietrich of the trend of accounting
problems and stock halts, but Longtop's case was especially
disconcerting because the company has some of the positives that
U.S. investors in China often look for, he said.
Longtop's auditor is the China member firm of Big Four
accounting giant Deloitte, and foreign investors often look to a
well-known auditor as a line of defense, Dietrich said. "A lot of
people thought that the solution was for these Chinese companies to
have major global auditors," Dietrich said, adding that the auditor
faces "some real questions."
A Deloitte spokeswoman declined to comment.
Longtop may also be viewed differently because of the method it
used to access U.S. markets. Unlike the rash of U.S.-traded shares
of Chinese companies that have been halted in recent months,
Longtop had a successful initial public offering in 2007. So-called
"reverse mergers," whereby a company joins with a U.S. firm with no
significant operations, have figured prominently in the stock
halts. The method has been a kind of backdoor entry into U.S.
markets for many Chinese companies.
The halts of other Chinese companies' stocks have dragged on in
several cases, wreaking havoc on owners of the stocks and
disrupting activity in areas linked to the equities market, like
stock options. China Agritech Inc. (CAGC) is one company whose U.S.
shares haven't traded in over two months.
As the accusations against Longtop mounted, the securities
lending business has reflected heightened skepticism. The retail
rate to borrow Longtop's stock, a proxy for bearish short selling,
nearly quadrupled during the month to May 10, Andrew Shinn,
director of research for SunGard's Astec Analytics business unit
said. The listed options market has also seen increased activity in
bearish puts to sell shares.
William Blair & Co. analyst Christopher Shutler downgraded
the firm's investment rating on the stock to "market perform" from
"outperform" Wednesday, citing the uncertainty over the halt and
the unknown timing for its lifting. Negative news is likelier than
a positive outcome, he wrote in a client note that said the
analysts would revisit their view "when additional data become
available." Other stock analysts were quiet as the halt stretched
into a second day.
With many U.S. investors eager for a slice of China's impressive
growth, the rash of stock halts capped by Longtop's problems this
week underscored the need to invest broadly in the country and
avoid attempting to pick stocks, some portfolio managers said.
"These types of stocks are definitely a dangerous investment
universe," Chad Deakins, portfolio manager of the RidgeWorth
International Equity Fund. He said his fund's preferred approaches
include investing in major multinationals with operations in
China.
Some saw a silver lining in the fact that the accusations being
aired today may not have seen the light of day a decade ago. "I'm
actually happy that these things are coming out, in general,"
Foxhall Capital Management's Dietrich said. "This says something
good about China -- that the regulatory process is starting to
work."
Longtop's stock last changed hands at $18.93. It traded as high
as $42.86 in November.
-By Brendan Conway, Dow Jones Newswires; (212) 416-2670;
brendan.conway@dowjones.com
--Michael Rapoport contributed to this report.
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