Chinese Stocks Hammered on Regulatory Fears

 | Dec 04, 2012 | 4:47 PM EST  | Comments
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Stock quotes in this article:

bidu

,

sina

,

sohu

,

dang

,

yoku

,

sfun

,

qihu

Chinese Internet stocks got hammered today on news that the U.S. Securities and Exchange Commission is cracking down on Chinese audit firms.

  • Baidu (BIDU) is down 6% to $90.
  • Sina (SINA) is down almost 8% to below $42.
  • Sohu (SOHU) is down 4% to $38.
  • Dangdang (DANG) is down to $4.
  • Youku (YOKU) is down 8% to $15.20.
  • Soufun (SFUN) is down to 5.5% to $22.
  • Even Qihoo 360 (QIHU), which had good earnings two days ago, is down 5% to $26.

To me, this seems like an overreaction and probably a buying opportunity, as this is sending many of these stocks down to fresh 52-week lows.

The reaction is precipitated by the belief that the SEC now has religion about prosecuting Chinese audit firms and that this is going to lead the agency to uncover some financial shenanigans at some or all of these companies.

In reality, we're still a long way from the SEC actually doing anything. The agency will have to propose something – probably in conjunction with the Public Company Accounting Oversight Board, which oversees U.S. auditors. Then the rule would have to be debated and probably watered down. Finally, if it is supported (which isn't a slam dunk), it will be implemented.

Then and only then would there be any "crackdown" on any of these specific companies. However, determining which companies the agency might want to investigate will also take more time.

And then there's the issue of the SEC being able to legislate and prosecute actions in another country in which it has no jurisdiction. Of course, the SEC could always use the threat of asking some of these companies to delist from the U.S. exchanges, but I doubt the regulator really wants to push that, especially with some of these high-profile Chinese names. Suddenly, the SEC would have sparked some international diplomatic issue.

To summarize, there's not likely to be any quick action against any of these companies mentioned. What this news means, though, is that the SEC is going after the auditors who stamp approvals on all the financials that get sent over to the SEC every quarter.

Part of the market reaction today is a fear or expectation that this action will result in these auditors being much more fastidious in their jobs and asking tougher questions of their Chinese audit clients.

What it could lead to is more delays of filing their 20-Fs, which is the equivalent of U.S. companies' 10-Ks with full financials for the year.

If any of these Chinese companies were to suffer from a delay in filing their 20-Fs, they know that investors would sell first and ask questions later. None of them wants that.

There was a lot of concern earlier this year that Qihoo 360 wouldn't be able to file its 20-F. The company did, and its stock has almost doubled since then.

This SEC report is in the news today, but it will probably be forgotten in a week or two.

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