Aluminum Corporation of China, or Chinalco, is a holding company and the controlling shareholder in Aluminum Corporation of China Ltd. (NYSE: ACH), or Chalco. Along with China National Offshore Oil Corp. and China Unicom, which respectively control Cnooc Ltd. (NYSE: CEO) and China Unicom (Hong Kong) Ltd. (NYSE: CHU), Chalco has been named as one of 17 state-owned enterprises to have irregularities and other violations in their financial statements to the Chinese government in fiscal year 2009. China’s Xinhua news agency reports that by March of this year 735 irregularities had been corrected and “65 people responsible for the irregularities or violations have been punished.”

The accounting irregularities for the 17 companies included overstatement of assets, profits, and liabilities by $292.4 million, $405 million, and $528 million, respectively. Undercounted assets totaled $446 million, while undercounted profits totaled $185 million, and undercounted liabilities totaled $385 million.

In the case of Chinalco, the problems appear to be violations of Chinese rules more than accounting irregularities. Chinalco included 11 companies in its 2008 financial report that failed to meet profit targets by the end of 2009 and launched or acquired 10 projects for which Chinalco did not have permission from the state. The total investment in the 10 projects topped $1.4 billion in 2008. Chinalco also got slapped for some irregularities in its senior managers’ shareholdings.

The troubles at Chinalco are reasonably small, but they should be the final straw needed to kill speculation about the company’s rumored intention to buy Alcoa, Inc. (NYSE: AA). The truth could be that China just doesn’t want to be embarrassed by another rejection of a bid for a large US firm. And Chinalco probably doesn’t want more scrutiny from the SEC after getting raked over by Chinese regulators.

Running afoul of China’s regulations governing state-owned enterprises is not the only issue. The so-called “Facebook of China,” Renren Inc. (NYSE: RENN) had to correct its financial statements just before its IPO earlier this month. Shares officially opened at $19.50, climbed to $24, and closed the first day’s trading at $18.01. Shares are now trading at around $12. Busted IPO for sure.

Hong-Kong based financial software maker Longtop Financial Technologies Ltd. (NYSE: LFT) lost its CFO, saw its auditing firm resign, and watched the US SEC initiate an investigation of the company’s financial reports. Shares had fallen -25% since the beginning of May before trading was halted last week. Longtop’s CFO was also an independent director and chairman of Renren’s audit committee.

Advanced Battery Technologies, Inc. (NASDAQ: ABAT) and China MediaExpress (OTC: CCME) are both Chinese reverse merger companies. Advanced Battery’s chairman has been accused of selling a key subsidiary to himself without compensating the company. A report by a short-seller has led to a -33% drop in the share price and a bevy of shareholder lawsuits. Advanced Battery makes lithium-ion batteries for electric vehicles, including its own line of motorbikes and scooters. China MediaExpress, the billboard company, saw its share price fall from near $20 to around $1.50 following a short-seller’s report regarding reporting irregularities.

China Shen Zhou Mining & Resources, Inc. (AMEX: SHZ) is one of China’s leading miners of rare earth minerals and other metals. If any company should be making money, this is one. But the company’s auditing firm issued a “going concern” note to China Shen Zhou’s 2010 10-K. The auditors apparently don’t agree that a private placement of $20 million in common stock and another $7.2 million in warrants is enough to keep the company going for all of 2011. China Shen Zhou’s stock peaked at $10.84/share in January, and trades at about $4.10 today.

While each of these companies may exemplify a different aspect of what’s going on with Chinese firms, they all have one thing in common: they’re Chinese. That is, they must operate under the constraints of Chinese regulations, which are a little hard to pin down at times. The major problem that firms face is that the Chinese government has given inflation fighting a pre-eminent position in its policy making. Higher interest rates, lower lending limits, and reduced liquidity make profitability uncertain.

There are also, apparently, more than a few executives willing to cut corners in pursuit of riches. Accounting rules in China are different from US SEC GAAP accounting rules, and taking advantage of those differences leads to different numbers on both Chinese and US reports, which leads to reports from short-sellers who smell blood in the water, and eventually to government investigations on both sides of the Pacific.

Finally, it’s also worth noting that China faces a serious real estate bubble and that many well-known investors are counseling short positions on Chinese real estate. But real estate, like copper, can be used by China’s small- and medium-sized firms as collateral for low-cost loans while the country’s banks are prohibited from making more loans.

China wants to grow its economy by about 8% annually in an effort to keep up with population growth, rising wages, and large numbers of retirees. To date the country’s exports, wild lending, and government funding have pushed GDP growth above 10% for a number of years. Ratcheting back to 8% means cooling the economy, as the government has done.

The problem is that the constant accelerate/brake pattern is hard to control. China essentially has no choice but to keep the shell game going. If it stops, no one will know for sure where the pea is. 

We have a saying here at 24/7 Wall St.: KNOW WHAT YOU ARE INVESTING IN!  It is getting hard to trust anything out of China at the moment.  Maybe trusting Chinese accounting is becoming the same as trusting that Chinese vitamins are even half of what they are supposed to be.  Welcome to the World of Knock-Off Accounting.

Paul Ausick

ASM International N.V. (NASDAQ:ASMI) rose over 5% to a yearly high of $24.69 after the semiconductor equipment maker was upgraded by Fortis Bank Nederland NV.

Autoliv Inc. (NYSE: ALV) rose over 3% to a yearly high of $41.84 after the airbag manufacturer said that production is holding up well in the fourth quarter.

Chico’s FAS Inc. (NYSE: CHS) rose over 14% to a yearly high of $15.43 after the women’s clothes retailer announced 3Q earnings of $0.13 per share, nearly doubling analysts expectations.  

General Growth Properties Inc. (OTC: GGWPQ) rose over 35% to a yearly high of $6.19 after Simon Property Group Inc. (NYSE: SPG) announced that it had hired Lazard Ltd to lookk into buying assets from General Growth.  

Longtop Financial Technologies Limited (NYSE: LFT) rose nearly 10% to a yearly high of $35.30 after the Chinese software developer said that it had added 3.7 million additional American depositary receipts priced at $31.25.

Deer & Company (NYSE: DE) rose over 6% to a yearly high of $52.28 after Jim Cramer recommended buying shares in the tractor maker, arguing that the company would benefit from increased agricultural activity.  

Garrett W. McIntyre

We have detailed information on the size, use of funds, underwriters, and performance on each below.

At Fortinet (NASDAQ: FTNT) and the priced 12.5 million shares in IPO at $12.50, the deal breakdown is as follows for the $156 million offering: 5,781,683 shares are being sold by the company and 6,718,317 shares are being offering by selling stockholders. Morgan Stanley, J.P. Morgan, and Deutsche Bank are joint book-runners; Robert W. Baird, RBC Capital Markets, ThinkEquity, and JMP Securities, and Signal Hill Capital Group LLC are co-managers. In addition, Fortinet has granted the underwriters a 30-day option to purchase up to an additional 1,875,000 shares of common stock to cover over-allotments.  Fortinet is in the field of network security and unified threat management solutions, and it priced above the $9 to $11 indicated range.

American Water Works Company, Inc. (NYSE: AWK), the largest water utility in the U.S., priced a 37.35 million shares at $21.63 per share after a closing bell price of $21.63 yesterday for a sale of close to $800 million.  This stake is entirely from RWE AG, the former parent and majority/largest holder, so none of the $784 million in gross proceeds go to American Water itself.  BofA Merrill Lynch, Credit Suisse, and Morgan Stanley are joint book-runners.  Shares are up 0.3% at $21.71 after a $21.63 close yesterday.

Boise Inc. (NYSE: BZ) 17 million shares priced at $4.85, and all shares here are also being sold by shareholders and insiders in the $82+ million raise.  Goldman Sachs was the sole book-runner.  Boise Cascade Holdings, L.L.C. (and trusts affiliated with Jason Weiss) will now ‘only’ hold about 25% of Boise’s common stock after the offering.  Shares are down 3.3% at $4.92 after a $5.09 close yesterday.

Longtop Financial Technologies Limited (NYSE: LFT) is actually trading way up this morning after it priced 3.7 million shares (ADS’s) at $31.25 per share, for more than $115 million raised.  Longtop is into software development and solutions which target the financial services industry in China.  The use of the net proceeds of the offering are earmarked for potential acquisitions and for general corporate purposes.  Deutsche Bank and Morgan Stanley were the joint book-runners.

Smith International Inc. (NYSE: SII) priced 28 million shares priced at $26.50 in a $730 million approximate raise.  Oddly enough, Citigroup just raised the rating on Smith International.  The net proceeds from the offering will be used for debt repayment, general corporate purposes, and funding of potential acquisitions or investments.  J.P. Morgan Securities Inc. is the book-running manager for the deal.  Shares are actually up 4% at $27.97.

We are seeing a whole new slate of S-3 secondary filings and still seeing plenty of S-1 IPO filings at the SEC each day.  If the market holds up, there will be many more days where the stock market has to absorb the $1.86 billion absorbed by the market this morning in new shares on the market.

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JON C. OGG
November 18, 2009