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Moody's levanta banderas rojas de alert a 61 companias Chinas.

Moody's Raises 'Red Flags' at 61 Chinese Firms

By KATE O'KEEFFE
HONG KONG—Credit-ratings firm Moody's Investors Service warned of "red flags" at 61 rated Chinese companies as it sought to provide transparency on its approach to ratings amid rising investor concern about corporate governance at such entities.

The flags are meant to "highlight issues meriting scrutiny to identify possible governance or accounting risks for non-financial corporate issuers in emerging markets" and relate to issues such as weak corporate governance, riskier or more opaque business models, fast-growing-business strategies, poorer quality of earnings or cash flow, and concerns over auditors and quality of financial statements, the report, issued Monday, said.

"To address investors' concerns and provide transparency on our approach to ratings, this report identifies warning signs—so-called "red flags"—for our rated, high-yield, non-financial Chinese companies," it added.

It noted that in recent weeks, a number of market participants including the U.S. Securities and Exchange Commission are looking into potential problems with the quality of financial reporting from publicly listed Chinese companies.

The report didn't include any ratings actions. Of the 61 companies, 49 have speculative-grade ratings.

Four Hong Kong-listed companies were highlighted as having a particularly large amount of red flags: West China Cement Ltd. had 12, Winsway Coking Coal Holdings Ltd. had 11, China Lumena New Materials Corp. had 10, and Hidili Industry International Development Ltd. had nine.

Moody's wrote that Winsway, Lumena and Hidili, as companies that mine coal or other minerals, "tend to attract scrutiny because it is often hard to value these assets and reserves in terms of size, value, or ownership rights."

The report notes West China Cement's chairman and his daughter dominate the company with 44% of its stock and the fact that the firm's auditors have changed twice.

Moody's notes Winsway, a coking-coal logistics business, has a short track record and a plan for rapid expansion.

Winsway said the short track record refers only to the period since its shares were listed in October. However, the company said it has released financial data from as early as 2007, which show a clear growth story. The company also said it conducts comprehensive technical due diligence on mining exploration.

Hidili raises red flags for its expansion plans, concentration of customers, slow accounts-receivable cycle and inventory turnover, according to the report.

Hidili said it was aware of the report but that it needed to study it further before commenting.

Lumena, a miner of thenardite, triggered red flags "for its rapid growth, short listing history, high concentration of customers and ownership, and poorer quality of earnings and cash flow," said Moody's.

Toronto-listed Sino-Forest Corp., whose shares have plunged following claims made by short seller Muddy Waters that it has overstated its assets, had seven red flags in the report. The China-based timber company has denied the June 2 allegations, and said an independent committee is investigating the claims.

Other firms didn't return requests for comment or couldn't immediately be reached.

The ratings agency said the "flags" didn't represent a change to its analytical approach.

"Our ratings already account for the inherent challenges in assessing these Chinese companies: their short history of operations, their diverse industries with limited peers for comparison, their concentrated family ownership structures, and their high-growth environments," said Moody's. It added that there is limited correlation between lower ratings and a higher number of red flags tripped.

Write to Kate O'Keeffe at kathryn.okeeffe@dowjones.com