This article first appeared in The Edge Malaysia Weekly on July 10, 2017 - July 16, 2017
CHINA’s phenomenal economic growth has given the world coveted companies like Jack Ma’s Alibaba Group. But it has also spawned less desirable entities that have caused grief to investors and regulators alike in Hong Kong, Singapore, the US, and even Malaysia, despite the fact that there are only a handful of China-based companies listed here, compared with over 100 so-called S-chips on the Singapore Exchange.
Hong Kong losing Alibaba — one of the most profitable and admired groups today — to the New York Stock Exchange is understandably still being debated two years on.
Meanwhile, nearer home, at least 10 Chinese companies on the Singapore exchange have been delisted in the past two years after they failed to meet listing requirements. A number of US-listed Chinese companies, not all of them bad, had also reportedly left the US bourse after being given the cold shoulder by investors.
Some so-called M-chips, as Malaysian-listed Chinese companies are referred to by some, might soon exit Bursa Malaysia.
Just last Monday, Bursa issued a show-cause letter to Multi Sports Holdings Ltd, demanding that the company, which listed here in August 2009, explain by July 10 why it should not be delisted after failing to meet extended deadlines to produce its audited accounts. Sino Hua-Ann International Bhd, among the earliest China-based companies to list in Kuala Lumpur, has also been given a deadline to regularise its operations or face delisting.
They might not be missed.
Undeniably, the bad publicity and poor perception investors have of most, if not all China-based companies, “is certainly serious”, says Lya Rahman, general manager of the Minority Shareholder Watchdog Group (MWSG).
She adds that it cannot just be “wrong perception” if there had been bad corporate governance and fraudulent practices.
She also points out that not all China-based companies should be labelled as rotten apples.
Among the 12 Malaysian-listed Chinese companies (13, if Malaysian-owned Sino Hua-Ann, which has Chinese assets, is included), at least three have been questioned by external auditors and another three have been late to submit audited accounts.
Their share prices have languished, with most trading well below their initial public offering (IPO) prices. Even those with what looks like sizeable cash hoards in their balance sheets show seemingly low interest income.
It does not help that even those with sizeable cash balances, such as XiDeLang Holdings Ltd, have found it necessary to make cash calls.
“An investor would have seen an erosion of 95% on their initial capital,” says Datin Ho Choy Meng, president of the Malaysian Investors’ Association, commenting on the tumble in of XingQuan International’s share price since its IPO in 2009. In the case of Maxwell International Holdings, which made its debut on Bursa in the same year, it would be a mind-boggling 98%.
“Why should a company like XingQuan, sitting on an enormous cash pile in its books, carry out a rights issue to raise cash from Malaysia? Why was its huge cash reserve not employed internally for business expansion?” Ho asks, lamenting the lack of quality Chinese listings on the local bourse.
The fall in the stock price could also be partly because of the lack of research coverage on M-chips. Analysts, however, cannot be entirely blamed for the lack of conviction. “The fixed assets of these companies are located too far away, which means greater difficulty in doing any site visiting”for investors to “check their premises, staff and working conditions”, says Ho.
Intrepid investors and journalists, for instance, would have likely showed up at a certain company’s warehouse, if it had been located within our shores, when news got out that auditors could not do a proper stock check as the entrances were blocked.
So, since these foreign companies are too far away to be checked out, should regulators shut the door on foreign IPOs to protect investors?
That might seem to be an extreme measure, and may not be fair to stock exchange operators vying to attract better Chinese companies looking to raise capital outside the mainland, considering the more-than year-long IPO queue there.
Yet greater scrutiny is warranted.
“We certainly need stricter rules, going by what has happened in the past. Bursa has been trying to beef up the listing requirements applicable to China-based companies and hopefully, with more stringent rules, we can prevent or reduce such undesirable happenings and head in the right direction,” says MSWG’s Lya.
Stock exchanges, she asserts, “should not compromise on quality just to attract more IPOs”.
“What stock exchanges require are quality companies with good corporate governance practices and not those that will tarnish the capital markets and cause investors to lose money and suffer.”
She is urging for a thorough analysis be done on why scams “seem to be more rampant among China-based companies”.
“The last thing we want is to have the image or reputation of our capital market dented and investor confidence shattered. Regulators should ensure that investors’ interests are protected.”
Malaysia, she points out, has not benefited much so far from such IPOs, which have only raised relatively small sums.
Quality Chinese stocks
There are many investable Chinese companies listed outside Malaysia. Malaysian Investors’ Association’s Ho cites internet giant Tencent Holdings Ltd — founded by Pony Ma Huateng — which is listed in Hong Kong.
Tencent is the 12th largest listed company by market capitalisation in the world in US dollar terms, just behind Alibaba Group at No 8, Bloomberg data on July 5 shows.
The data also shows that four Chinese state-owned banks listed in Hong Kong and/or Shanghai — Industrial & Commercial Bank of China Ltd, China Construction Bank Corp, Agricultural Bank of China Ltd and Bank of China Ltd — made more net profit in FY2016 than the likes of JP Morgan Chase, Bank of America-Merrill Lynch, Berkshire Hathaway, Google’s parent Alphabet Inc, Microsoft Inc as well as South Korea’s Samsung Electronics and Japan’s Toyota Motor. All these companies were among the 15 most profitable in the world for fiscal year 2016.
Apple Inc, the maker of iPhones, is not only the most valuable listed company but also the most profitable in FY2016.
Malaysia has seven companies with a market capitalisation of more than US$10 billion market, but not of them made a profit of US$10 billion.
Compare that with the most profitable company in Hong Kong, billionaire Li Ka-Shing’s C K Hutchison Holdings Ltd, which made US$17.6 billion in FY2016, but only ranked No 132 globally last year. Alibaba, with a profit of US$45.4 billion, clocked in at No 27, while Tencent, which recorded a profit of US$25.6 billion, was No 75.
It is worth noting that 16 of the 35 Chinese companies with more than US$10 billion in profit in FY2016 are state-owned. State-owned companies on the Hong Kong bourse also account for 17 of the 25 Chinese companies listed outside the mainland that made it to the list of the world’s 500 largest corporations by market capitalisation. There were also 14 companies listed in Shanghai or Shenzen that made more than US$10 billion in profit in FY2016.
Ho has called for greater scrutiny of financial accounts and material disclosures by listed companies, by the regulators and the investing public.
For potential investors, she has some advice from famed children’s author Dr Seuss: “You have brains in your head. You have feet in your shoes. You can steer yourself in any direction you choose. You’re on your own and you know what you know. And you’re the one who will decide where to go.” She also cites US President Donald Trump, who said, “Sometimes your best investments are the ones you don’t make.”
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