Two major companies in a prominent USD 1.4 billion Asia investment fund managed by New York banking giant Morgan Stanley unexpectedly told securities regulators they will not file their financial statements on time and froze trading in their stocks, actions generally considered to be cause for concern.
The publicly traded companies, Tianhe Chemicals Group Ltd and Sihuan Pharmaceutical Holdings Group Ltd., separately announced late last week that they would be unable to meet Hong Kong Stock Exchange deadlines because auditors have not yet signed off on their financials. Both companies pledged to cooperate with the auditors.
Tianhe and Sihuan are valued at USD 3.7 billion and USD 6 billion, respectively. They are among 16 companies that comprise a private equity fund managed by Morgan Stanley & Co. LLC, known as Morgan Stanley Private Equity Asia Three, or MSPEA III. An Australian and an Indian company owned by that fund have already failed amid criminal and civil fraud allegations.
A spokesman for Morgan Stanley, Nick Footitt, declined to comment on the missed filings. A Tianhe spokeswoman also declined comment. Sihuan responded to some questions in an emailed statement but said only that the auditors needed more time and that the company was operating as usual.
The twin filing delays raise uncomfortable questions for Morgan Stanley, which picked the companies from obscurity then promoted them as multibillion-dollar growth stories. "This is not something an auditing firm would do lightly," said Paul Gillis, a former Partner for PricewaterhouseCoopers LLP in China who now teaches accounting at Peking University.
"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 and Sihuan could eventually receive a clean bill of health, although announcements about earnings delays due to unfinished audits are generally regarded as portending bad news.
Any material problems that led to the delay would have to be disclosed once the companies file their financials. As US investors increasingly consider Chinese stocks, they rely on investment banks like Morgan Stanley to keep troubled Chinese companies from reaching the market.
Morgan Stanley's private equity team has promised investors it would perform rigorous due diligence and take stakes only in companies where it could exert influence or control. As part of its investments in the two companies, the same Morgan Stanley executive director, Homer Sun, received a seat on each company's board.
Tianhe Chemicals, the largest investment in the Morgan Stanley fund, was the subject of an investigation by The Associated Press last year and already had its stock frozen last year amid allegations that the company overstated the scale and sophistication of its business.
