Tianhe Chemicals Group Ltd. is now taking additional steps in an attempt to assuage the investment community about its business operations, this time warning that its auditor, Deloitte Touche Tohmatsu Ltd., was preparing to disclaim its audit opinion regarding its tax payments, bank statements and vendor relationships. Such a move by an audit firm for a client is a drastic step as it is warning the business and investment sectors that it cannot adequately verify these critical aspects of that company’s operations.
In a filing with the Hong Kong Stock Exchange last Friday, the company disclosed these reasons for the delay in the publication of its 2014 annual results.
This is another blow for Tianhe Chemicals as it seeks to recover from an Associated Press investigation last year that reduced the market value of the company from USD 7.9 billion to USD 3.7 billion. Along with the Associated Press investigation, Tianhe Chemicals requested trading of its shares to be temporarily suspended by the Hong Kong Stock Exchange in late March 2015. Due to allegations last September by an independent research group, Anonymous Analytics, that it was overstating profits in its initial public offering prospectus ahead of its Hong Kong listing last June, trading was halted for about a month.
In an Associated Press article by Jeff Horowitz, this effort was described as a, “…shadowy group tied to speculators betting against Tianhe’s stock…”
Many publicly traded companies in China have come under attack from research groups dedicated to uncovering improprieties, publicizing their findings, and then profiting from shorting the stock. Speculators profit from shorting a stock by borrowing shares at a higher price. When the price drops due to accounting allegations or others of this nature, the speculators replace the shares at a lower price. The difference in the share price from the plunge is then pocketed as profit by those holding short positions. The most prominent of these groups going after Chinese stocks include Muddy Waters and Glaucus Research, among others.
In March 2012, Morgan Stanley, a leading American financial firm, purchased a USD 300 million stake in Tianhe Chemicals Group Ltd. through Morgan Stanley Private Equity Asia, an investment fund of about USD 1.4 billion. At that time, Morgan Stanley has one of its executives, Homer Sun, placed on the board of directors of Tianhe Chemicals Group Ltd. Sun declared then, “We are very excited to enter into a long-term partnership with the outstanding management team of this Chinese specialty chemicals champion that has developed world-class R&D capabilities. We expect to closely collaborate to support Tianhe’s transition from a domestic leader to a major global player in specialty chemicals.” When the allegations later surfaced about Tianhe Chemicals Group, Morgan Stanley stated that it stood “resolutely” behind the company.
About the actions by Deloitte Touche, Paul Gillis, a former Partner for PricewaterhouseCoopers LLP, another prominent auditing firm, who now teaches accounting at Peking University, noted that, “This is not something an auditing firm would do lightly. There are only two reasonable explanations for being late. One is management incompetence. Two is they’re fighting with the auditors. And neither one of those is good.”
Tianhe Chemicals is the largest investment for Morgan Stanley Private Equity Asia. Morgan Stanley also took Tianhe Chemicals Group public, raising USD 654 million in an offering that was the fourth largest at the time for the year. On the website of Morgan Stanley Private Equity Asia, Tianhe Chemicals Group Ltd. is described as, “…China’s largest producer of lubricant oil additives and a leading global producer of specialty fluorochemicals.”