source from：WSJ
MARKETS  HEARD ON THE STREET
Chinese Water Company Makes Wrong Kind of Splash
Beijing Enterprises Water buys a stake in rival Sound Global, after regulators suspended the company’s shares from trading

By JACKY WONG
May 2, 2016 1:25 a.m. ET
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Beijing Enterprises Water is dipping into murky waters.

The state-owned Chinese water infrastructure developer disclosed last week that it has become the second largest shareholder of water-purification and sewage-treatment peer Sound Global. The purchases came only a few days after Hong Kong’s market regulator, the Securities and Futures Commission, halted Sound Global from trading.

The SFC didn’t disclose why it made the rare move, but it can do so, for among other reasons, if it thinks a company has published materially false, incomplete or misleading information. Previous companies that suffered from the same fate include Hanergy Thin Film Power, the solar company whose shares imploded last year.

The trading-halt order is the latest woe to afflict Sound Global. Short seller Emerson Analytics questioned the financials of the wastewater-treatment company in February 2015, causing the stock to swan dive. The company fought back and the shares largely recovered. But shortly after that, Sound Global said it couldn’t publish its annual results on time and subsequently found that there was a 2 billion yuan (309 million dollars) cash shortfall on its books. The stock remained suspended for 10 months. Sound Global eventually resumed trading in January after making an independent probe into the issue, but then the stock plunged again before the SFC ordered the shares halted.



Many investors clearly don’t like the implications of a regulator-mandated trading halt. Asset manager Schroders, which had added to its Sound Global position after Emerson’s initial allegations, sold its 5.2% stake for the same price and on the same day that Beijing Enterprises Water bought its shares. Shares of suspended companies can trade in over-the-counter transactions.

Beijing Enterprises Water’s stock has dropped 7% since the Sound Global purchases came into light, wiping nearly $400 million off its market value, more than five times the value of its nearly 12% stake in Sound Global. It is hard to like the company plunging itself into a fraught governance situation—even if Sound Global’s shares seem inexpensive. Investors may also worry that Beijing Enterprises Water could splurge even more cash on the hope that Sound Global can be rehabilitated while under scrutiny.

There is slight comfort that Beijing Enterprises Water is making something of a calculated bet. A Beijing Enterprises Water director was Sound Global’s chief executive officer until 2011, having worked there for around a decade. Beijing Enterprises Water also has experience dealing with controversial companies. It acquired assets from Standard Water in 2013, a company that aborted a planned Hong Kong listing as its auditor found inconsistencies in its documents.

Beijing Enterprises Water’s business is turning sewage into clean water. Investors are right to be skeptical it can apply those skills to Sound Global.