September 3, 2014 3:48 pm

Banks that sponsored Tianhe IPO suspend analyst coverage

Two of the banks that sponsored the Hong Kong flotation of Tianhe Chemicals have suspended analyst coverage of the company after it was accused of fraud by a group claiming links to cyber-hacking collective Anonymous.

Bank of America Merrill Lynch and UBS halted their coverage of Tianhe, according to people familiar with the matter, having both taken sponsor roles on its initial public offering. Both banks declined to comment.

Bank research teams often suspend coverage of stocks when large uncertainties arise but the two banks, along with Morgan Stanley, have been in the spotlight for their roles as sponsors in bringing Tianhe to market in June.

New listing rules introduced last year in Hong Kong made banks acting as IPO sponsors legally responsible for any misinformation contained in listing documents.

Morgan Stanley – also an investor in Tianhe – did not immediately return requests for comment.

Tianhe went public on the Hong Kong stock exchange in June after raising $650m from investors in one of the city’s biggest listings of the year so far. The company’s 30 per cent rally since its float gave it a market capitalisation of $8bn – making Tianhe one of the biggest targets of a group linked with short sellers.

Anonymous Analytics said while it holds no position itself in Tianhe, readers of an AA report about the company could assume affiliates stood to gain from any fall in the share price.

Trading in Tianhe was halted on Tuesday following the release of the AA report, which described the company as a “massive fraud and one of the biggest stocks scams ever conceived”, and claimed that its true sales and profits were well below figures stated in its prospectus.

Late on Tuesday Tianhe said the AA report contained “errors of fact, misleading statements and malicious accusations”, and that the company reserved the right to “take legal action for damages and other relief”.

A spokesperson for Tianhe said on Wednesday that the company was still working on a clarification announcement, which it would file to the stock exchange “as soon as practicable”. Shares will remain suspended until the formal clarification is published.

Tianhe management and bankers were on the US east coast on Tuesday, preparing for meetings with investors when the AA report was published.

A number of listed Chinese companies have been accused of fraud in recent years. The most high profile case – Toronto-listed Sino-Forest – resulted in the company’s bankruptcy, and helped make shortseller Muddy Waters a well-known name among investors in Asian stocks.

However, a number of other similar attacks have failed. Shares in New York-listed Qihoo 360 have risen fivefold since the release of a critical report by AA in 2012.

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