Can China firms buck their bearish trend?

by **Cals** Mon 11 Nov 2013, 00:13

Published: Saturday November 9, 2013 MYT 12:00:00 AM
Updated: Saturday November 9, 2013 MYT 7:04:24 AM
Can China firms buck their bearish trend?
BY GURMEET KAUR AND YVONNE TAN
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WHEN a stock trades below its initial public offering (IPO) price, investors may shrug it off and say the fault lies with the company or its valuations.
It is when an entire group of stocks are under water that the investors will wonder about the issues dragging their investments down.
That, in a nutshell is the story of China companies listed on Bursa Malaysia. All stocks except XiDeLang Holdings Ltd (XDL) are trading below their IPO price and questions are plentiful when one tries to understand why that is the case.
XiDeLang saw its share price climb to a recent new high of 42 sen on Nov 1, almost doubling from 28 sen at the beginning of October.
Presumably, this was buoyed by some unconfirmed news that the shoe-maker is set to tie-up with America’s Wal-Mart Stores Inc which is also the world’s largest retailer in a RM100mil deal.
Xidelang sold its shares to the public four years ago at 58 sen each. It later issued a one-for-one bonus issue and sold warrants at five sen each.
Assuming an investor who bought the IPO share and subscribed to the warrants, his investment cost would be 63 sen.
The investor now owns two Xidelang shares and one warrant.
Based on the current share price of 33 sen and his warrant trading at 11.5 sen, his holdings is now worth 77.5 sen.
Low valuations
In most cases, however, the valuations some of these stocks are trading at are staggeringly low. Is the discount warranted because investors just don’t understand this universe of companies – which started out as shoe makers and has now evolved into different industries – or is it because no one trusts their books and balance sheets?
Industry observers point out a few obvious flaws, which have raised doubt for investors, one of which has to do with the companies’ financial accounts.
“For example, investors should really question the ‘reasonableness’ of their accounts,” remarks one minority investor who claims to have made some substantial trades on these counters.
One example is China Stationery Ltd (CSL). As of Dec 31, 2012, its paid up capital 6,226,000 yuan (RM6.2mil) but the net profits were 464,706,000 yuan(2011) and 465,489,000 yuan (2012)
“What type of business allows you to have yearly profits at about 75 times the paid up capital? It’s just a bit odd,” he says.
Assets in China
Much of the concerns of prospective Chinese company investors here are also focused on the companies’ investment or assets which are mainly located in China.
“Prospective investors are wary of the fact that fixed assets (plants, warehouses, machines) are located too far away from Malaysia, which translates into an issue when it comes to ‘site-visiting’,” a fund manager notes.
“That aside, most of the companies probably regret listing here, look at the values that they are getting for their companies,” points out an industry observer.
Accounting scandals surrounding Chinese companies listed in Singapore and the United States do not help.
In the United States, for instance, investors have lost billions of dollars on Chinese companies selling shares on US exchanges since 2010 because of accounting scandals, according to a report in the South China Morning Post (SCMP).
Many of those companies have been removed from US exchanges, it noted but hundreds still have shares trading on the exchanges of the world‘s largest economy.
To this end, both the Chinese and US authorities had in May agreed on a deal that would allow regulators in the United States to gain access to Chinese companies’ audit information.
According to SCMP, the non-binding deal is only a partial victory for the United States, which has been deterred from investigating accounting scandals at many mainland companies listed on US stock exchanges.
It applies only to enforcement cases against auditors, not against mainland-based companies suspected of accounting fraud plus does not allow US regulators to conduct on-the-ground inspections of auditors on the mainland, a key part of efforts to combat fraud, SCMP says.However, this is a step in the right direction, James Doty, chairman of the Public Company Accounting Oversight Board, the US regulator for audit firms was quoted as saying in SCMP.
“Perhaps our regulators could take a leaf from this?” the industry observer says.
First casualty
Back home, Bursa’s first Chinese company financial casualty was in the form of foodstuff manufacturer HB Global Ltd, previously known as Sozo Global Ltd.
Recall in May, it slipped into the Practice Note 17 category after its external auditors raised a red flag on its latest audited financial statements.
The company had difficulty submitting its latest audited financial statements by the end of April, announcing on Bursa that it would be delayed.
As of May, it was one of the 24 companies under PN17 status, which made up 2.63% of the total number of 914 companies listed on Bursa.
Noteworthy is that Khazanah Nasional Bhd was one of the pre-IPO investors in this company. The government investment arm holds 10.4 3% of HB Global post-IPO, via its outsource fund Agro Treasures, which only invests in agriculture and food sectors.
Acounting and financial issues aside, Chinese companies are not perceived to be attractive, less so because of their “unsexy” business (five of the nine are shoe makers), notes one minority shareholder, but more so because of their “unwillingness” to pay dividends despite some of them being cash-rich.
“Granted, most Chinese companies are growth stocks but if they can afford to pay to attract investors, why not?”
Of the nine China-based stocks, most do not have fixed dividend policies.
Both CSL and Maxwell International Holdings have said that they will pay not less than 20% of their yearly net profits to attract investor interest.
Since it got listed, CSL has paid several rounds of dividends while Maxwell gave out dividends in 2011 and last year.
In Maxwell’s case, it has already said that there would be no dividends for the current financial year ending Dec 31, in view of its new factory construction in Henan, retail branding business and the “uncertain economic situation” which has impacted its financial results this year.
Maxwell currently has about RM243mil in its cash coffers.
Meanwhile, many also argue that investors have yet to get used to the idea of Chinese companies listed on Bursa as the regulator has been late in the game in attracting foreign listings compared with its regional neighbours like Singapore which has more than 200 Chinese listings.
In 2006 the Securities Commission announced the opening up of the local market but it was only three years later that Bursa received its first China-based IPO. “There was talk before of Indian and Vietnam companies also being a new source of IPO candidates for the Malaysian bourse, but that has not happened till now. Perhaps they are discouraged from the unsatisfactory performance of Chinese stocks,” quips a fund manager.
It is said of all of the Chinese stocks, CSL appears to be the one with some substantial following from brokers and investors.
Its stock hit an all-time high of RM1.93, 103% above its IPO price of 95 sen causing its market capitalisation to balloon many times over.
But its share price has plunged to a mere 22 sen or one-fifth of its 95 sen IPO price after the proposed share swap deal with Pelikan International Bhd in Nov last year didn’t pan out.
The tie-up had initially seen CSL acquiring a 9.8% stake in Pelikan for RM50mil via the issuance of new CSL shares to several Pelikan’s major shareholder that was subsequently unwound.
“Was the corporate exercise well-thought of?” asks an observer pointing out that issuing of news shares tend to dilute shareholders interests.
CSL had net cash of 2.015 billion yuan or RM1.068bil as at June 2013 translating into a net cash per share of 86 sen. The stock’s book value per share, meanwhile, stood at RM1.18.
Notably, during this period, the major shareholder of CSL - Lead Champion Ltd was starting to pare down its 72% to just 45% now, according to Bloomberg.
“Why would they, the major shareholder sell at a time when the share price is weakening, considering that they have the cash to support the share price?”
Incidentally, on Oct 1, the company told Bursa that its company CEO, Jiang Danpinghad passed away.
The situation with China stocks has put the spotlight on Bursa. Did the exchange do the right thing by wooing China listings?
In an e-mail reply, Bursa says that attracting new listings is an ongoing effort by exchanges around the world based on their own value proposition.
“For Bursa, our competitive edge lies in the commodity-based segments such as plantation and oil and gas sectors where our public listed companies are accorded a higher valuation compared to their peers listed in other regional exchanges. Currently, our public listed companies with China-based operations are mostly listed under consumer products sector.”
Bursa in turn reckons that Chinese companies should be doing more to promote themselves.
But that may not be as simple as it seems as some Chinese companies have been making the effort to engage analysts and fund managers.
Privatisation?
With battered-down valuations, the likelihood of privatisations and corporate exercises cannot be ruled out, say some analysts. This nearly took place in the instance of XDL.
The company’s major shareholder reportedly revealed that he held informal discussions with Navis Capital Partners to sell a stake to the latter.
It was said that XDL’s founder and managing director Ding Peng Peng was “frustrated with the stock’s lacklustre share price”. But the talks with Navis, it seems, did not pan out.
“Certainly, some companies would be better off privatising their firms and perhaps taking it to some other market to list,” says Lim Tek Seng, deputy managing director of JF Apex Securities Bhd.
Market perception
MSWG chief executive officer Rita Benoy Bushon says the poor stock price performance of China-based stocks could be due to the negative market perception of their counterparts in Singapore.
“Thus, we encourage these companies to be more transparent and deliver value to shareholders, i.e. having sustainable profits and healthy cash flows as well as declaring consistent dividends. They should also engage with shareholders, analysts, fund managers and have periodic analysts’ briefings.”
To the question whether the local bourse needs China listings, Rita says the watchdog is not adverse to listings of companies from other geographical regions. “The filtering criteria, on the onset should not be compromised and quality companies allowed to be listed in the local bourse.”
She says from a minority shareholder perspective, there may be some shareholders who may not be too pleased with the non-payment of dividend or minimal payment of dividend by some of these China-based companies, despite having substantial cash in their books. Checks have revealed that a number of these companies are sitting on cash per share that far exceed their share prices.
There is a reason though for the cash preservation. Analysts say that China companies listed here sometimes find it difficult to get bank financing and as such need to keep a certain amount of cash for expansion.
MSWG’s Rita however points to the case XDL that recently called for a rights issue. “There was one company calling for right issues making it very dilutive to other shareholders who do not wish to subscribe to the rights issue. This has caused discomfort and concerns to the current minority shareholders,” she says.
XDL recently proposed a rights issue which is expected to raise up to RM113mil, which it intends to invest on the second phase of the group’s new design and production centre in Fujian, China. At the same time it has some RM153mil in its coffers.
Another stock that has come under spotlight is China Automobile Parts Holdings Bhd which is doing a private placement of up to 60 million new shares, just nine months after being listed.
The timing for the corporate exercise has raised eyebrows, firstly because the company’s share price has halved and secondly, it has cash and cash equivalents of RM195.8mil as at June based on its published financial statements.
Still interested
It seems that Chinese companies are still keen to list here with the 10th IPO set to come from Kanger International Bhd, a bamboo flooring manufacturer.
In a prospectus published on the Securities Commission’s web site in April, Kanger said it was planning to allocate 80 million new shares in the IPO, which represented 18.61% of its enlarged paid-up share capital.
tarBizWeek had reported that the company has as shareholders members of the Perlis royalty with chairman, Datuk Paduka Sharipah Hishmah Sayed Hassan, owning a 3.93% indirect stake in the company post-IPO. She is the sister-in-law of the Raja of Perlis Tuanku Syed Sirajuddin Jamalullail, another shareholder of the company while and her son, Syed Hazrain Syed Razlan Jamalullail, is also a director in the company.
Kanger’s major shareholder is founder and managing director Leng Xingmin, who owns a 67.7% that would be diluted to 55.17% post-IPO.
Financially, the company has been on a growth trajectory in the last three years.
But it remains to be seen whether it would change the negative perception plaguing this universe of stocks.
Give us a chance