UPDATE - Accounting problems at China Life predecessor
Wednesday February 4, 9:13 am ET
By Tony Munroe
(Updates with more details)
HONG KONG, Feb 4 (Reuters) - China Life Insurance Co. Ltd, which last year's sold the world's largest IPO at $3.5 billion, said on Wednesday that state auditors uncovered accounting irregularities at its predecessor company, a development that could deflate investors' China mania.
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The company, whose shares at one point almost doubled from their IPO price, also faced a slew of research reports saying it was overpriced, including an unusual "sell" rating from one of the banks that helped sell its IPO, Citigroup. The bank set a price target about 17 percent below the current price.
"Something has to pop the China bubble, and this kind of event is certainly a contributory factor," said investor activist David Webb, a board member of bourse operator Hong Kong Exchanges and Clearing who urged the exchange to suspend the China Life shares.
Chinese companies, including state-run China Construction Bank, are planning IPOs this year that could be worth some $15 billion.
China's state audit office said on its Web site that it had found about 5.4 billion yuan (US$652 million) worth of irregularities involving China Life's predecessor company.
State-controlled China Life has existed in its current form since June 2003, when it was formed to cherry-pick healthier policies from its parent. It said the audit was routine and covered a period up to 2002 -- before the restructuring.
The Hong Kong and New York-listed company acknowledged the state's audit but described as "inaccurate" a press report saying the irregularities involved more than 35 billion yuan.
The news came a day after another U.S. company, Quality Distribution Inc. (NasdaqNM:QLTY - News), announced similar accounting problems. Quality Distribution also recently made its initial foray into the public markets.
REALITY BITES
Shares in China Life fell 3.57 percent Wednesday to close at HK$5.40, still 50 percent above their initial offering price. Company officials could not immediately be reached for comment beyond the brief statement early in the day, its first public remarks on the matter.
The audit found "inappropriate competitive problems" totaling 2.38 billion yuan and 2.5 billion yuan in "inappropriate" use of premium funds, including loans and investments, according to the National Audit Office Web site. It also found 28 possible criminal cases involving 489 million yuan.
It found that nearly 31.8 million yuan had been placed into "little treasuries," which are off-book accounts used to distribute bonuses.
Investors hungry for exposure to China's 8-plus percent economic growth have largely ignored concerns about transparency and management quality at Chinese companies during the recent rally.
China Life's IPO was about 25 times subscribed and triggered the sort of frenzy that led some watchers to warn of a looming bubble. Accounting concerns around the company might bring a measure of sobriety that some industry watchers said was needed.
"It will cool IPO mania. It's needed to prick the air out of a market that has been quite frenzied," said Nitin Dialdas, a research analyst Richmond Asset Management.
CHERRY PICKING
China's bad debt-laden state banks are also expected to carve off the bulk of their bad assets for exclusion from their listing vehicles when they launch their IPOs.
On Monday, China Life held a conference call during which it sought to assure investors that it faced no recourse from the audit, according to research reports.
"While China Life provided no detail, we understand the irregularities may have been in the range of 5 billion yuan," Deutsche Bank, another of its underwriters, wrote in a note rating China Life a "hold."
Webb criticized China Life's handling of the matter.
"If they have something to say, they should say it to the public first, not to analysts," he said.
Meantime, North America's largest operator of bulk tank trucks, Quality Distribution, saw its stock drop 15 percent three months after going public, after saying it would have to restate three years of results because of irregularities at a subsidiary.
No. 2 Chinese life underwriter Ping An Insurance is preparing an expected $2 billion listing this year.
China's National Audit Office is also looking into the accounts of state giant Industrial and Commercial Bank of China (ICBC), which has a Hong Kong-listed unit ICBC (Asia).
(Additional reporting by Daisy Ku and Katie Hunt in Hong Kong, Scott Hillis in Beijing and Chris Sanders in New York)
(US$1=8.28 Yuan)
Fred
POLITICIANS & DIAPERS BOTH NEED TO BE CHANGED,
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