If one bad apple spoils the whole barrel, imagine if half are rotten?  Photo:

Translated by Andrew Vanburen from a Chinese-language piece in Sinafinance

THE YEAR IS half over.

For investors in the Hong Kong stock market, especially those putting their money on IPOs, it couldn’t be over fast enough.

That’s because it’s just been revealed that half of the newcomer firms to the Special Administrative Region’s bourse are embroiled in troubles of one form or another.

Topping the list of infractions are a string of accounting irregularities plaguing nearly half of all IPOs that landed in Hong Kong in the first six months.

Cases in point of troubled tickers that recently went public include two consumer sector brands that might be more familiar to reader/investors: Boshiwa International (HK: 1698) – a maker and retailer of children’s clothing across the PRC, and baby formula play Daqing Dairy (HK: 1007).

Both have been suspended from trade since March, hardly the start their underwriters and IPO investors had in mind when their respective prospectuses planted dreams in shareholders’ heads of tapping China’s gargantuan but elusive domestic market.

Growing Pains: Children's clothing brand Boshiwa has seen its HK-listed shares suspended from trading since March.  Photo: Company

Add to that the very spotty-at-best reputation of PRC-branded baby formula brands and it’s no wonder Daqing chose to take a breather from the trauma of daily trading.

To date, the market regulator and the firms themselves have given no indication when their accounting issues might be resolved or when they might be allowed to trade again on a daily basis.

Also included among the list of recent arrivals to the Hong Kong Stock Exchange to face growing scrutiny over their balance sheets include high tech firms like Trony Solar Holdings (HK: 2468), a maker of “photovoltaic modules,” shop talk for solar panels.

The new energy firm, part of a growing group of tech plays that seemed to be the darlings of analysts only a short while ago, announced last week that the company’s board “discovered” accounting and order reporting “inconsistencies,” and the firm’s shares were promptly suspended from trading.

A market watcher with close ties to many first half IPOs said that 50% of them have repeatedly had similar problems in their short tenure on the bourse, and the net fallout from these troubles has been a sudden reluctance of firms to even attempt to go public in Hong Kong, and an equal timidity by the market watchdog to approve any new listings in the near term.

Shady Accounting: Trony, maker of sun-powered petrol stations, has not traded in Hong Kong for the past week. Photo: Company

Furthermore, it has sent a collective shiver to the “other half” of the Class of 2012, i.e. those IPOs that have avoided trouble in the first six months.

This translates into a diminished eagerness of the “better half” of the newcomer firms to delve too deeply into their own books for fear of falling out of favor with a more demanding and even paranoid investing public and regulatory framework, the market watcher added.

“Few people are paying much attention to Hong Kong’s IPO market potential because of all this.”

Adding to the growing sense of insecurity is the lack of information released when a neophyte listco suddenly enters a share-trading halt or freeze.

As an example, there was little sunshine and a lot of shade last week when Trony Solar provided the vague description of “inconsistencies” without offering more specific reasons behind the sudden suspension of trading in its shares.

With the dismal 50% rate of IPOs passing their half-year health checkup, and the relative lack of prognosis about what’s ailing the other half, it’s not hard to see why confidence in Hong Kong’s IPO regime and prospects is currently lying in sick bay.

See also:

HK SHARES: Trash Already Tossed To Curb

In Praise Of China’s Retail Investors

Whither China Shares?

CHINA SHARES: Market Watchers All Over Map

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