Accounting problems found at China Life prede

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Last updated at: (Beijing Time) Wednesday, February 04, 2004

Accounting problems found at China Life prede

China Life Insurance Co Ltd, which sold the world's largest IPO at US$3.5 billion last year, said on Wednesday that state auditors uncovered accounting irregularities at its predecessor company.

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China Life Insurance Co Ltd, which sold the world's largest IPO at US$3.5 billion last year, said on Wednesday that state auditors uncovered accounting irregularities at its predecessor company.

The company, whose shares at one point almost doubled from their December 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 17 per cent 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 the China Life shares.

Chinese firms, including state-run China Construction Bank, are planning IPOs this year that could be worth some $15 billion.

China's state audit office said on its Web site that it had found about 5.4 billion yuan (US$652 million) worth of irregularities involving China Life's predecessor firm.

State-controlled China Life has existed in its current form since June 2003, when it was formed to cherry-pick healthier policies from its parent. It said the audit was routine and covered a period up to 2002 -- before the restructuring.

The Hong Kong and New York-listed company acknowledged the state's audit but described as "inaccurate" a press report saying the irregularities involved more than 35 billion yuan.

Shares in China Life fell 2.68 per cent on Wednesday to HK$5.45, still 52 per cent above their initial offering price. Company officials could not immediately be reached for comment beyond the brief statement early in the day, its first public remarks on the matter.

The audit found "inappropriate competitive problems" totalling 2.38 billion yuan, and 2.5 billion yuan in "inappropriate" use of premium funds, including loans and investments, according to the National Audit Office Web site. It also found 28 possible criminal cases involving 489 million yuan.

It found that nearly 31.8 million yuan had been placed into "little treasuries," which are off-book accounts used to distribute bonuses.

Lehman Brothers said in a research note rating China Life "underweight" with a HK$5.12 price target that it expects the audit probe to have an "immaterial" impact on the firm, if any.

Cherry Picking

China's bad debt-laden state banks are also expected to hive off the bulk of their bad assets for exclusion from their listing vehicles when they launch their initial public offerings.

On Monday, China Life held a conference call during which it sought to assure investors that it faced no recourse from the audit, according to research reports.

"While China Life provided no detail, we understand the irregularities may have been in the range of 5 billion yuan," Deutsche Bank, another of its underwriters, wrote in a note rating China Life a "hold".

Webb criticised China Life's handling of the matter.

"If they have something to say, they should say it to the public first, not to analysts," he said.

"And what they've said is not enough. We need to know what the allegations are and what the findings were at the audit office," he added.

Another broker, Cazenove, has a "reduce" rating on China Life and said the life underwriter is more vulnerable to losing market share from its current 45 percent than compatriot PICC Property and Casualty Co. It said the life sector faces greater potential competition from foreign foes than the non-life sector.

Number-two Chinese life underwriter Ping An Insurance is preparing an expected US$2 billion listing this year.

Source: agencies

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