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Management shake-ups fuel China solar stock selloffs

Investor concern over accounting practices by Chinese companies is showing signs of spreading to the solar sector following a series of management shake-ups in the last few weeks, spelling tougher times ahead for these companies.

Solar firms have struggled this year with shrinking margins and depressed solar prices, while uncertainty over government incentives has also dimmed the sector’s outlook.

Adding to these worries is a series of management changes that has further rocked investor confidence in solar stocks.

Solar panel maker Trina Solar on Tuesday said its audit committee chief Peter Mak resigned from its board, sending the company’s shares down more than 11 percent.

More resignations followed with Chinese panel maker Suntech Power Holdings announcing on Wednesday the resignation of its head of U.S. operations, without explaining why he left. That same day, solar cell company JA Solar Holdings said it’s chief financial officer resigned.

None of those companies have been implicated in any accounting scandals but their shares all fell nearly 10 percent each this week, hitting the lowest point for the year.

“Trina and the other big names may not be outright frauds, but there is probably still tons of corporate governance issues,” said Andrew Grieve, renewable energy analyst at Religare Capital in Hong Kong.

“I wouldn’t be surprised if we see more problems,” said Grieve, adding that US investors were getting very skittish over all the China names.

Investors on high alert

A barrage of accounting scandals that have tainted foreign-listed Chinese firms has put investors on high alert for accounting discrepancies.

Short selling attacks have spared few industries but investors have been particularly bearish toward Chinese companies in the energy and resources segment due to the massive scale of growth and investment sums plowed in.

Chinese solar firms are not new to accounting scandals.

Last year, Chinese solar cell company Canadian Solar launched a probe led by its board following a subpoena from the U.S. Securities Exchange Commission (SEC) requesting documents relating to some sales transactions. The company, whose stock slid 22 percent following the probe, said its transactions were accounted for based on internal investigations, but hired a new chief financial officer later in the year.

Chinese solar wafer maker LDK Solar agreed in 2010 to pay $16 million to settle shareholder lawsuits claiming the company overstated inventory and inflated earnings in 2007.

LDK’s former financial controller alleged in 2007 that the firm misstated its inventory, sending its stock down more than 40 percent. LDK’s own inventory investigation cleared the firm.

Accounting phenomenon

Analysts say the suspicion surrounding China-based companies could be damaging even for companies adopting more transparent business models.

“Trina is one of the most straightforward and crisp of all the Chinese company business models with little to no related party sales or inter-company financial transactions therefore less opportunity for accounting irregularities,” said Citigroup analyst Timothy Arcuri, who cited the market’s reaction to be “extreme.”

Extreme or not, the management shake-up at solar companies is happening at a time when investors are increasingly wary over transparency of Chinese firms after a slew of mainland companies listed in North America have been hit by accounting problems, delistings and negative research reports.

“It’s a general phenomenon,” said Betty Tam, partner at Herbert Smith law firm.

“For investors if they are not familiar with the background of the companies they really need to be very, very careful.”

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