July 11, 2011 / 5:51 PM / 8 years ago

Moody's raises red flags at 49 Chinese companies

* Family ownership common risk, Moody’s says

* Report follows string of accounting scandals

NEW YORK, July 11 (Reuters) - Rating agency Moody’s Investors Service, responding to investor concerns, on Monday raised warnings about accounting and corporate governance risks at dozens of China-based companies.

Accounting scandals at U.S.-listed companies based in China have been the subject of dozens of investor lawsuits and regulatory probes.

Among the most common corporate governance weaknesses was concentrated family ownership, found at 43 firms, Moody’s said.

“Weak corporate governance may lead to decision-making processes that favor the interest of some or all shareholders at the expense of bondholders and other creditors,” Moody’s said.

Predominant family control makes it difficult to get a clear view of a company’s corporate governance practices, the rating agency said.

Moody’s said it screened 49 junk-rated companies and a few investment-grade firms in China against 20 red flags, grouped into five categories: weak corporate governance, risky business models, fast-growth strategies, poor earnings quality and audit concerns.


All 49 junk-rated firms triggered at least three red flags, with several tripping 10 or more.

Sino-Forest TRE.TO, a China-based forestry company accused of accounting irregularities, tripped seven red flags, including high customer concentration, aggressive growth, large negative free cash flow, and low taxes paid relative to its accounting profits, according to Moody’s.

A spokesman for Sino-Forest was not immediately available for comment.

Other common red flags were high levels of negative free cash flow, found at 43 companies, and aggressive growth, found at 41 companies. Aggressive growth can overextend management’s attention, company infrastructure and financial resources, Moody’s said.

Moody’s said its report did not reflect a change in its ratings approach.

“Our ratings already account for the inherent challenges in assessing these Chinese companies: their short history of operations, their diverse industries with limited peers for comparison, their concentrated family ownership structures, and their high-growth environments,” Moody’s said.

Reflecting those risks, about 80 percent of companies it rates with predominately Chinese operations have junk ratings, in contrast to China itself, whose sovereign rating is Aa3, one of the highest investment grade ratings, Moody’s said.

“We plan to follow up soon with a report for other high-yield issuers in the Asian region,” Moody’s said. (Reporting by Dena Aubin with additional reporting by Euan Rocha; Editing by Howard Goller and Matthew Lewis)

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