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In the wake of the scandal engulfing Chinese forestry company Sino-Forest, Scotia Capital is sounding a note of caution about other Chinese companies listed on the TSX through what are called reverse takeovers.
Analyst Ben Isaacson on Tuesday revised risk ratings higher on two Chinese fertilizer companies, Hanfeng Evergreen (HF-T) and Migao (MGO-T), to 'caution warranted' from 'high risk'.
Both Hanfeng Evergreen and Migao gained their listing on the Toronto Stock Exchange through reverse takeovers. The technique involves a private firm buying a publicly traded shell company in order to list on a stock exchange without the lengthy disclosure process of an initial public offering.
"While our revised HF/MGO risk rating is not an attempt to group the two small cap Chinese fertilizer companies with those Chinese RTOs [reverse takeovers] that have recently been accused of fraud, we are erring on the side of caution," Isaacson said in a note to clients on Tuesday.
Isaacson said his team has visited the Chinese plants of both companies and spoken with major customers, and are currently not aware of any non-arms-length transactions.
Isaacson does note that Michael Manley, a Director on Migao's board, also sits on the Board of Zungui Haixi, which recently had its trading halted after Ernst and Young suspended its audit.
The note from Scotia Capital comes as Sino-Forest, a forestry company listed in Toronto since the mid-1990s that once had a market capitalization of more than $6 billion, faces fraud allegations. The Ontario Securities Commission recently halted trading of the company's stock. CEO Allen Chan stepped down shortly afterwards.