China Life Says Auditors Uncovered Irregularities
China Life Insurance Co., whose $3.5-billion initial public stock offering was the world’s largest for last year, said Wednesday that state auditors had uncovered accounting irregularities at its predecessor company, a development that could deflate investors’ latest China mania.
The company, whose shares at one point almost doubled from their IPO price, also faced a slew of research reports saying it was overpriced, including an unusual “sell” rating from one of the banks that helped sell its IPO, Citigroup. The bank set a price target about 17% below the current price.
“Something has to pop the China bubble, and this kind of event is certainly a contributory factor,” said investor activist David Webb, a board member of bourse operator Hong Kong Exchanges and Clearing, who urged the exchange to suspend China Life shares pending more clarity on accounting questions.
A number of Chinese companies, including state-run China Construction Bank, are planning initial public offerings this year that could raise about $15 billion.
China’s state audit office said on its website that it had found the equivalent of about $652 million worth of irregularities involving China Life’s predecessor company.
China Life has existed in its current form since June, when it was formed to cherry-pick healthier policies from its parent. The company said the government audit was routine and covered a period up to 2002 -- before the restructuring.
The Hong Kong and New York-listed company described as “inaccurate” a news report saying the accounting irregularities involved the equivalent of more than $4 billion.
The company’s U.S.-traded shares fell $2.13 on Wednesday to close at $26.67 on the New York Stock Exchange.
The IPO price of the NYSE shares was $18.68 on Dec. 16. They soared to a peak of $34.75 by Dec. 29.
Investors hungry for exposure to China’s rapid economic growth have largely ignored concerns about accounting transparency and management quality at Chinese companies during the recent rally.
China Life’s IPO was about 25 times oversubscribed and triggered the sort of frenzy that led some watchers to warn of a looming bubble. Accounting concerns around the company might bring a measure of sobriety that some industry watchers said was needed.
“It will cool IPO mania. It’s needed to prick the air out of a market that has been quite frenzied,” said Nitin Dialdas, a research analyst at Richmond Asset Management.
