This article first appeared in The Edge Malaysia Weekly on July 10, 2017 - July 16, 2017

IT is ironic that when China seems to be showing its confidence in Malaysia by investing billions in it, most major shareholders of China-based companies listed on Bursa Malaysia — also known as red chips — seem to have been dumping their shares.

It has not gone unnoticed that promoters of these Chinese firms, except for HB Global Ltd and Maxwell International Holdings Bhd, have been trimming their stakes since the IPOs.

For instance, China Automobile Parts Holdings Ltd founder Ong Juan Tee is no longer a substantial shareholder of the company after selling 40 million shares off market in September 2015. His stake has shrank from 54.4% post-IPO to less than 5% now (see chart).

Similarly, China Stationery Ltd executive chairman and CEO Chan Fung’s stake in the plastic stationery manufacturer has dropped from 74.88% post-IPO to 12.32% today while Kanger International Bhd managing director Leng Xingmin’s stake in the bamboo flooring maker has fallen from 55.17% post-IPO to 24.45%.

Promoters of K-Star Sports Ltd, Multi Sports Holdings Ltd and XiDeLang Holdings Ltd, namely Chan Kai Fly, Lin Huozhi and Ding PengPeng, also seem to have given up their controlling interest in the companies after cutting their stakes from more than 50% to about 30%.

Public perception is that the major shareholders of the China-based firms are cashing out, rattling the confidence of local investors.

When you own 50% plus one share, you are deemed to have a controlling interest in a company while the remaining shareholders do not have significant decision-making power in it. Now, if a major shareholder dumps his shares, the company’s share price is likely to be hit hard.

In addition, when a major investor exits, the minority shareholders may see it as a sign of trouble and start selling their shares, pushing down the share price even more.

Simply put, if the major shareholder does not have confidence in his own company, why should anyone else?

Indeed, not too long after their IPO exercises, the share prices of red chips started to nosedive.

XingQuan International Sports Holdings Ltd, the first China-based firm to be floated on Bursa Malaysia in July 2009, was listed at RM1.71. On June 2, it was traded at a historical low of only 4.5 sen.

Maxwell has also been sold down by the Malaysian market since its listing in January 2011 at 54 sen. It was classified as a PN17 company after its external auditor, Baker Tilly Monteiro Heng, expressed a disclaimer of opinion in its audited financial statements.

Maxwell’s 52-week high on Feb 17 was a dismal four sen while its 52-week low on July 6 was just 1.5 sen.

So, which came first? Did the share prices of China-based firms head south because the major shareholders reduced their stakes? Or did they sell because they were fed up with seeing the company’s share price heading south?

Note that China began to tighten scrutiny of big shareholders’ equity disposal after a market meltdown in 2015 when 40% of the market’s value was wiped out in a few months. The Chinese securities regulator then capped stake sales by major shareholders at 1% of a company’s total shares every three months.

The rules were aimed at preventing large stock sales by major shareholders that disturbed market order and damaged investor confidence, according to the China Securities Regulatory Commission.

The watchdog agency also warned that shareholders will be held accountable for false disclosures, insider trading and stock market manipulation.

The rules, which give detailed requirements, are aimed at reducing the impact of major shareholders’ stock sales on other investors and encouraging long-term investment.

Coming back to Malaysia’s red chips, HB Global and Maxwell, which are PN17 companies, are the only two China-based entities that have seen their promoters either maintain their holding or increase their stakes.

HB Global CEO Shen Hengbao has been maintaining his stake in the gourmet convenience food maker at 57.09% since its IPO while Maxwell founder and president Jenny Li Kwai Chun has even raised her stake in the shoemaking firm from 54.5% to 58%.

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