NY Listings ‘Flatter China’s Top 10’
Earning Outlook Is Poor, Report Argues Fears of ‘Cookie Jar’
September 17, 2007
By Jennifer Hughes and Anuj Gangah
Top Chinese companies listed in New York have poor quality earnings, argues a research
report highly critical of the New York Stock Exchange for allowing the listings.
The report comes days after the NYSE opened an office in Beijing to persuade Chinese
businesses to choose New York for listings.
Exchanges are in a fierce battle for business. New York, once pre-eminent, has suffered in
recent times with many choosing London or Hong Kong instead.
RateFinancials, an independent research firm, studied the 10 largest Chinese companies with
market capitalisation of about $750bn and an average price/earnings multiple of 24.7 that implies
they will generate strong earnings growth.
Studying the publicly available accounts of the 10, the analysts found a range of problems,
differing by company. No rules were being broken, but poor earnings quality implies the outlook
may be less rosy than investors expect. The NYSE declined to comment, but sources close to the
exchange said its criteria for listings remained stricter than any other exchange's.
There were different problems at the companies including insufficient cash flow to fund cash
needs and a history of negative working capital, a condition that exists when a company grows
rapidly, but which is unsustainable in the long run. The study found signs of possible earnings
management with low allowances for bad debt and other provisions not keeping pace with
inventory growth. That may mean so-called ‘cookie jar’ accounting - where companies lower
reserves and use excess cash to boost revenues.
“These companies are government-controlled enterprises masquerading as independent
public companies and it is virtually impossible to assess their financial condition given their poor
level of disclosures,” said Victor Germack, founder and president of RateFina