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Hong Kong companies face tougher scrutiny
There was an encouraging nugget in an otherwise worrying report on Friday by leading Asia-based brokerage CLSA.
First the bad news: a record 38% of Asian companies are destroying shareholder value, returning less than their cost of capital; the proportion burning cash is at a three-year high; and 20% of them are borrowing to pay dividends, according to the Financial Times (paywall).
CLSA’s findings were part of a report screening 2,500 of the biggest companies in Asia-Pacific (ex-Japan) for “red flags” that could indicate problems with the quality of their earnings or balance sheets.
Companies with several balance sheet-related red flags tend to underperform the broader market by 18%, notes CLSA, while those with poor-quality earnings do so by 7%.
Hong Kong-listed companies look especially vulnerable. As many as 1,285 have filed profit warnings this year, which is the most in eight years.
But, here’s the good news – although at first glance it might seem perverse.
The number of companies that had their shares suspended for financial distress and accounting issues both doubled last year and are set to be even higher this year.
For years investors have complained about poor governance and opaque accounting practices at the Hong Kong’s listed but tycoon dominated companies, and despaired at lax stock market supervision.
Now, the territory’s regulators might actually be raising their game.
Photo: Barbara Willi