IN 2009, only 14 companies made their debut on the stock exchange. It was the year that saw the lowest number of initial public offerings (IPO) since the super bull-run days of the 1990s.
That was also the year foreign IPOs were introduced to the local bourse. The first was XingQuan International Ltd, a Chinese-based sports shoe maker, which was listed in July.
Wooing foreign IPOs that promise exciting growth was an attempt by Bursa to make the local bourse more vibrant.
The number of IPOs was substantially higher in the following two years, with China-based manufacturers helping to boost the numbers.
To date, there are 11 Chinese stocks on Bursa. The number of listings more than doubled to 29 in 2010 and 27 in 2011, but fell below 20 in subsequent years.
Last year saw only 13 new listings — the lowest in three decades.
So far this year, there have been eight.
Foreign IPOs have not helped much in the last three years.
To put it bluntly, not only has it been not fruitful, but it has also dented market sentiment in foreign IPOs among local investors. In short, the sceptics have been proven right.
Accounting problems among the China-based stocks have made investors wary of them (see ‘Accounting issues at Chinese firms in other markets’ on Page 70).
The most recent jolt came from XingQuan, when it announced that 3.6 million pairs of custom-made shoes had been rejected by a single client.
The mistake cost it a bomb. The shoemaker lost RMB415.7 million (RM252.06 million), more than the accumulated net profit of RMB382.13 million that it earned in the financial year ended June 30, 2014 (FY2014), and FY2015.
The rejected orders resulted in XingQuan posting its first annual net loss of RMB542.1 million (RM353.1 million) in FY2016, compared with a net profit of RMB250.5 million (RM130.9 million) the year before.
Although it is still in net cash position, the company’s cash pile shrank 21% to RMB1.14 billion (RM685.9 million) as at June 30, from RMB1.45 billion (RM875.3 million) a year ago.
XingQuan’s problem is probably not a big surprise to investors who have been tracking Chinese stocks listed on Bursa. Its peers have their own problems, such as external auditors not being able to verify cash in the bank and the loss of accounting books in a fire, among others.
The regulators’ role
By now, Malaysian investors might have grown tired of hearing about the problems with China stocks. But the issue has also raised questions about the regulators and the quality of foreign IPOs.
When Bursa first approved the listing of China-based companies, it drew criticism mainly because that was the time when corporate scandals among Singapore’s S-chips (China-based companies listed on the Singapore Stock Exchange) were surfacing across the Causeway.
The Edge, which gave it the benefit of the doubt, had written then that it was true that there was a risk “black sheep” might be attracted to list on Bursa. However, the rational decision was not to block foreign IPOs, but take steps to minimise the risks. The burden would be on the gatekeepers, including the investment bankers, Securities Commission Malaysia (SC) and Bursa. Due diligence is vital to differentiate the good from the bad.
It has been seven years since the listing of XingQuan. The foreign IPOs are all from China, although the plan then was to draw companies from various countries. In six of the 11 companies, accounting issues or corporate developments are making investors wary.
So, how did the black sheep manage to get through the gate?
Both the SC and Bursa reiterate that stringent rules and requirements are in place to ensure the quality of IPOs on the local stock market.
“The regulator, in considering and approving listing applications of companies (including foreign-based companies), applies stringent admission criteria to ensure the companies listed on Bursa are of certain minimum quality,” Bursa says in a reply to The Edge’s question on whether Bursa is getting companies that have been rejected elsewhere.
To ensure compliance of the foreign companies with the listing requirements, Bursa notes that it has regular engagements with audit committee members, the advisers, statutory auditors and management.
“In our monitoring of the listed companies, where we detect any non-compliance or potential non-compliance with the listing requirements as well as other areas of concerns, Bursa will take the relevant pre-emptive actions and such other actions, which are to engage and investigate where the concern relates to the listing requirements or refer/escalate to the relevant authorities.
“Where there is a contravention of the listing requirements, Bursa will not hesitate to initiate enforcement proceedings and take relevant actions as deemed appropriate under the listing requirements and the law against the errant company and its relevant directors,” says the stock exchange.
Meanwhile, the SC says that as a matter of policy, all IPO applications are subject to a robust review process by itself.
However, the regulator stresses that investors should mind their own risks. And that it is the duty of the advisers, namely investment banks who earn hefty advisory fees from successful IPO applications, to go the extra mile to conduct due diligence and screen IPO candidates.
“All foreign companies seeking a listing in Malaysia are expected to disclose key risk factors such as the different legal systems in their prospectuses. Investors who invest in foreign companies are expected to read the prospectuses, which provide clear disclosures on the unique risks of investing in such foreign companies,” says the SC.
“The advisers themselves must be familiar with the foreign company, its promoters and the operating environment in that particular jurisdiction.
“Once a company is listed, its share price and business performance are impacted by various factors, including market forces, risks of the relevant sector, as well as its ability to garner investors’ interest,” it adds.
Is Bursa still attractive?
To be fair, Malaysia is not the only stock exchange that has had unpleasant experiences with IPOs from China.
“There is an unwritten rule in Hong Kong that IPOs from China have to be either state-owned enterprises or the promoters have to be reputable individuals, otherwise it will be difficult to get the green light. This shows that other markets are also cautious about China stocks,” says a corporate adviser, who has been involved in a few China IPOs (see Page 70).
“Companies in China are very different from those elsewhere in many ways. Accounting standards are one of many issues and the ultimate purpose of the IPOs is sometimes questionable,” he tells The Edge. “It is very challenging to play the China IPO game.”
One may argue that the blame should not be put on the gatekeepers. As the SC has rightly pointed out, investors must scrutinise the prospectuses before jumping into any investments. They should be responsible for their investment decisions. Others may not entirely agree.
That aside, the failure to draw quality foreign IPOs to Bursa remains a concern, given the lack of new local listings.
Perhaps a more worrying trend recently is that of Malaysian-based companies seeking to list abroad.
Corporate advisers have observed that the competition is no longer just with local peers, but foreign rivals too. “Some potential IPO candidates whom we have engaged have told us that they may want to be listed elsewhere, not Bursa ... this is happening here,” says an investment bank executive.
Few may know that a Malaysian-based logistics solution firm called Worldgate Global Logistics Ltd, which has its headquarters in Puchong, Selangor, made an impressive debut on the Hong Kong stock exchange two months ago.
Its IPO price was 35 HK cents and the stock rocketed to a high of HK$6.06. It closed at HK$2.36 last Thursday.
Before that, Nirvana Asia Ltd, which was taken private due to its low valuation on Bursa, relisted on the Hong Kong bourse in December 2014. The share price has not performed that well, but still, the company is valued at HK$7 billion, many times more than what it was worth on Bursa.
However, Bursa explains that while it makes efforts at leveraging its strengths to attract new listings, one should note that from a company’s perspective, selecting a listing destination is determined primarily by its business strategy and a combination of factors, which includes valuation, composition of investor base and visibility for its stakeholders.
“The current economic backdrop is a challenging one, and despite that, in US dollar terms, Bursa Malaysia has been the top Asean equity fundraising destination in 2014 and 2015. This shows that our efforts in enhancing the attractiveness of Bursa Malaysia as a preferred listing destination is bearing fruit,” Bursa says.
More companies are expected to go offshore to list in the future. That is not good news for the local stock exchange. Simply put, the attempt to draw foreign IPOs does not appear to have reaped the desired results. At the same time, the country is losing local companies, which are fit for listing, to other bourses.
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