Hong Kong’s Securities and Futures Commission sanctioned Tianhe Chemicals Group Ltd. and its executive director this week, finding them culpable for greatly overstating the company’s revenue and profits in the lead-up to its 2014 initial public stock offering.
In a decision announced Tuesday, the commission said its Market Misconduct Tribunal suspended Executive Director Wei Xuan for four years from serving as a director or participating in the management of any company listed on the Hong Kong exchange. It also ordered Wei and Tianhe to reimburse the commission for its costs in the case, though it did not disclose the total of those costs.
Tianhe conducted its IPO on June 9, 2014, raising net proceeds of approximately 3.5 billion Hong Kong dollars (U.S. $454 million) in what turned out to be the fourth-largest initial offering on the Hong Kong exchange that year. The company, which is based in Jinzhou, China, claimed at the time to be the largest lubricant additive supplier in Asia and said it aimed it grow big enough to compete with the industry’s four main suppliers of additive packages, Lubrizol, Infineum, Chevron Oronite and Afton Chemical.
Tianhe was dogged by problems on the stock exchange from a few months after its IPO. In September 2014, a shadowy watchdog organization, Anonymous Analytics, published a report accusing Tianhe of several fraudulent statements in the prospectus for the stock offering. The Securities and Futures Commission briefly suspended trading of the company’s stock shares while it rebutted the allegations.
In March of 2015, trading was suspended again when the company failed to meet a deadline for reporting its 2014 financial results. The company said its filing was delayed because its auditor gave greater scrutiny to its reporting following the Anonymous Analytics report and was not satisfied by the company’s responses to all of its questions.
From that point missed filings piled up. The Securities and Futures Commission raised a few questions about Tianhe’s business and said the company had to address them before trading of its shares could resume. The company never did satisfy the commission, which finally delisted it from the exchange in June of 2020.
In the decision announced this week, the misconduct tribunal concluded that the ¥12.6 billion (U.S. $2 billion at today’s exchange rate) of revenue that Tianhe’s prospectus reported for 2011 to 2013 was overstated by ¥6.7 billion, or 53%.
“The overstated revenue and profits were likely to induce subscriptions for or purchases of the shares of Tianhe and/or to increase the share price of Tianhe in Hong Kong,” the release stated. “The MMT concludes that Tianhe and Wei were reckless as to whether the overstated revenue and profits in the prospectus were false or misleading when authorizing the issuance of the prospectus.”
The SFC said Tianhe’s misstatements about revenue concerned three customers. The prospectus claimed ¥3.2 million in revenue from PetroChina from 2011 to 2013, but the correct number was just ¥51,284, the commission said. Likewise the company ¥364,989 in revenue from Shanghai High-Lube but actually had zero and reported ¥3.3 million from Citic but actually had just ¥22,483. Tianhe’s was one of several controversial IPOs that led the Hong Kong exchange to crack down on companies and stock offering organizers and to amend some of its rules. In 2019 the Securities and Futures Commission fined UBS, Morgan Stanley and Merrill Lynch for inadequate due diligence in Tianhe’s offering along with – in UBS’s case – offerings of other companies.