Tianhe denies fraud allegations, MSPEA offers full support
Tianhe Chemicals has issued a point-by-point rebuttal of allegations that it made false statements in its IPO prospectus, with second-largest investor Morgan Stanley Private Equity Asia (MSPEA) declaring its full support.
The company requested a suspension in trading on September 2 in response accusations of fraud tabled by Anonymous Analytics, a faction of international activist and hacker network Anonymous. The group, which has previously targeted other listed Chinese companies, said Tianhe was guilty of "one of the largest stock market frauds ever conceived."
Claiming its assessments were based on company reports, tax statements, market analysis and visits to customers, Anonymous Analytics specifically accused Tianhe of: overstating its profitability; failing to pay the amount of taxes it claims to have paid; keeping two sets of books; doing business with related parties and very small or non-existent customers; and exaggerating the potential size of its market.
Tianhe responded by saying that the Anonymous Analytics report "includes a combination of falsified information, forged signature of the company's chairman and blatantly untrue statements," which it believes have been used to undermine its reputation and manipulate its share price. The company also challenged the report's understanding of the specialty fluorochemicals industry and the author group's credentials, citing its predilection for anonymity and consequent lack of accountability.
Tianhe addressed each of Anonymous Analytics' specific accusations. The group has since responded in similar point-by-point format, standing by its claims and describing Tianhe's report as "half-baked."
Although the cost of borrowing shortable shares in Tianhe has risen since trading was suspended, a source familiar with the situation told AVCJ that the company's leading institutional shareholders have expressed satisfaction at the response. Shares in the company will remain suspended until all relevant information has been provided to the Hong Kong Stock Exchange. Tianhe is expected to scale up its IR and PR efforts over the coming week in order to allay any remaining concerns.
MSPEA committed $300 million to the company in 2012 - its largest investment to date - and held a 9.35% stake ahead of the Hong Kong IPO. Following the offering, which saw Tianhe raise $658 million, it held 8.6%.
"We stand resolutely behind Tianhe's world-class management team, which has steadily and consistently invested in R&D over the past two decades to build global market-leading positions in its two principal business segments of lubricant additives and specialty fluorochemicals," Homer Sun, MSPEA's CIO and a non-executive director at Tianhe, said in a statement released by the Chinese company.
Founded in 1992, Tianhe is China's largest manufacturer of lubricant oil additives that perform functions including friction reduction, cleansing and heat dissipation in motor oil and other lubricants. It also supplies specialty fluorochemicals - commonly used in waterproofing and solvents - to customers around the world. The company reported revenue of RMB5 billion ($803 million) for 2013, up from RMB4.2 billion in 2012. Net profit for 2013 came to RMB2.6 billion, up 19.9% year-on-year.
According to a source familiar with the situation, MSPEA spent upwards of $2 million on pre-deal due diligence, including asking a Big Four accounting firm to conduct a full audit rather than review accounting records from existing audits. The PE firm also had 10 people on the ground for six weeks going through all the documentation.
MSPEA previously successfully weathered a short-seller attack on Chinese nutrients company Yongye International. The PE firm agreed to invest $50 million in 2011 and after the deal received investment committee approval but before it was announced, a US hedge fund accused Yongye of manipulating its earnings. After a delay for further review the deal went through.
Earlier this year, MSPEA supported Yongye's chairman and CEO in a privatization of the company.
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