What's Going On at Duoyuan Global Water?

Includes: DGWIY, DYP
by: Tate Dwinnell

Duoyuan Global Water (DGW), one of the top China water plays, is plunging today after Piper Jaffray downgraded the stock from Overweight to Underweight and slashed the price target from $34 to $9 due to concerns over its ties to Duoyuan Printing (NYSE:DYP), which fired its auditor and reorganized top management. Since the two companies share some key executives, Piper is concerned there are internal control and corporate governance issues at DGW as well.

According to the DYP press release, the company announced the dismissal of its auditor Deloitte Touch Tohmatsu and the reorg of top executives, including the CEO and CFO. Xiqing Diao will be DYP’s new CEO, replacing existing CEO Christopher Holbert, who also happens to be the CEO of Asian Financial for Duoyuan Global Water. The other connection is that the Chairman of DYP, Wenhua Guo, also happens to be DGW’s CEO. This appears to be a “where there is smoke, there is fire” scenario, and any shady practices going on at DYP, may be going on at DGW.

This will take some time to sort out because DYP management won’t host a conference call until Wednesday, so there is still speculation as to why Deloitte was fired and why management was shuffled and how all this relates to DGW outside of the management connections. All we have now is a vague quote from DYP Chairment Wenhua Guo:

“The audit committee’s decision to change auditing firms was based on its desire to resolve open issues and file our 10-K on a timely basis. We will work closely with our new auditors to address the open issues aired by Deloitte. We believe that our several internal reassignments are the best way to move the company forward and complete our annual audit. We believe we now have the right people in important roles to execute the company’s business strategy and to meet our current reporting obligations.”

This isn’t the first time a China based company has collapsed due to corporate governance concerns and unfortunately won’t be the last. It appears today that investors are selling first and asking questions later.

Disclosure: No positions

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