In a normal market environment, Trina Solar’s (NYSE:TSL) news today regarding changes in the company’s board of directors would have been dismissed at the headline level as being generally irrelevant. However, in today’s super sensitive market concerning fraud at Chinese companies, even minor news was enough to send TSL shares over 15% lower on heavy trading volume.
Most of the concern is likely linked to Mr. Peter Mak's resignation as an independent director and chairman of Trina Solar's audit committee. Undoubtedly, links will be made to the same Peter Mak who has been A-Power's (APWR) CFO for the past two years. APWR has been linked to fraud concerns and has not been able to provide audited financials for the most recent fiscal year, which has caused several of its independent directors to resign. According to A-Power news last week, Mr. Mak's term will expire on July 15 and thus he will be stepping down and replaced.
At first glance it would appear as negative news for Trina Solar, but all things considered, it can be argued TSL's independent board of directors is strengthened by the removal of a director who has been the financial chief of a company suspected of corporate fraud. After all, Mr. Mak will be replaced by Mr. Jerome Corcoran, who has served as a managing director and international investment banking head at separate Merrill Lynch positions in the past.
Typically, market sentiment cycles are broken on event driven news. How often have stocks bottomed on extreme negative news flow during industry cycles? How often have sectors topped when the lowest investment grade companies in hot sectors get upgraded as premium companies? The same sentiment may also apply regarding recent fears over U.S. listed Chinese stocks as concerns spread from micro-cap unknowns to much larger established companies such as Trina Solar.
Indeed, attacks by bears as fraud claims started to spread to more established Chinese companies have started to backfire. Most recently, fears over Spreadtrum Communications (SPRD) being the next Chinese fraud caused shares to drop by as much as a third in value intraday. By the end of the trading day, SPRD shares recovered nearly all of its intraday losses, and in the following trading days shares rallied further to ultimately double reaction lows.
Unlike many micro-cap U.S. listed Chinese reverse mergers which occurred at the height of the “buy China” craze around the time of the 2008 Beijing Olympics, Spreadtrum was brought public in 2007 by large U.S. investment banks such as Morgan Stanley, Lehman Brothers, Piper Jaffray, and Needham & Company. While this is no guarantee against fraud, generally more due diligence is completed, since well known Wall Street firms would unlikely risk reputations on unknown Chinese companies. In addition, SPRD has always been audited by a big four auditor, and its latest 2010 annual report was audited by Pricewaterhouse Coopers. Most of the recent Chinese fraud concerns have involved more obscure local companies using lower tier investment banks and auditing firms.
The same situation most likely applies to Trina Solar today. TSL was brought public in a normal IPO process in late 2006, led by Merrill Lynch along with Cowen and Company along with CLSA Asia-Pacific. Trina Solar has always used a big four auditor and its latest 2010 annual report was audited by Deloitte Touche Tohmatsu.
Unlike many small Chinese companies with less confirmable domestic businesses, Trina Solar exports over 90% of its products to well known markets around the world such as Europe and the United States. Many of its customers are large utilities, regional distributors, and solar project developers. Depending on location, investors can witness TSL’s products in the field first hand since the company has concentrated on high profile projects to increase brand recognition. Within the industry, Trina Solar is among the largest five producers globally and widely viewed by Wall Street analysts as perhaps the best managed U.S. listed Chinese solar company with a proven execution record.
Since sentiment over Chinese stocks and solar companies is still currently very negative, it would be difficult to see if it has reached a climax. Based on past Wall Street cycles, often events such as recently seen with SPRD and TSL mark sentiment pivot points. Obviously not all Chinese companies are frauds, nor as outsiders can any investors guarantee immunity.
However, when fears of small, obscure Chinese companies covered by second tier investment firms have shifted to higher tier companies with even more questionable unknowns, it could mark a cyclical inflection point. Remember it was a dozen years ago the Internet bubble started to unravel as sentiment gradually shifted away from larger names to more speculative companies which ultimately went bust. Only time will tell, but these events are worth noting from a historical point of view.