Tuesday, 5 July 2011

Vanity thy name is Chinese Company

Vanity thy name is Chinese Internet Company, went the title of an earlier post of mine here. I should correct this now to Vanity thy name is Chinese Internet Company. How else can you explain the rush of Chinese non Internet companies who want to list in the US ?

There are 900 companies with businesses mainly, or only, in China listed in the US. Compared to that there are only some 2000 odd companies listed on the Chinese mainland. Does this make any sense ? Why are Chinese companies falling over each other to list in the US ? Usual reasons - Greed and Vanity.

Greed first. Anything beginning with the letter C is now hot in the US. Never mind that the investor does not know, or care, whether China is to the East or West of Topeka KS. Anything even remotely related to China must be leading to a pot of gold. Hence the stampede towards China stocks. A scene reminiscent of the wildebeest crossing the Mara river. The expert analysts, investors, fund managers all seem to possess exactly the same intelligence as that of the wildebeest.

Greed is also at the back of sundry bankers and advisors egging on Chinese companies to list in the US. Prospect of fat fees has them drooling.

Vanity is the other side of the coin. For some reasons, Chinese owners and CEOs believe their prestige is enhanced by being a "foreign listed company". Local government officials suffer from the same malady - number of foreign listed companies in their domain seem to be a mark of manhood. Supply side stampede.

Getting your company listed in the US is not a joke. Its a laborious process. So the wise intermediaries have discovered the route of a reverse merger. Acquire a shell listed company in the US and merge your company with that one. And Hey Presto, you are now listed in the US. One quarter of all reverse merger transactions of listed companies in the US between 2007 and 2010 were by Chinese companies.

After the champagne, and after the advisors have pocketed their fees and disappeared, comes the problem. 11 Chinese companies have seen their shares being suspended for trading on NASDAQ. Another dozen or so have been delisted or suspended on other US exchanges

The problem is that corporate governance standards in China are nowhere near the requirements of a US listing. Accounting standards and their adoption are also not in the same league. Auditors are not of the same calibre. This does not mean that the intrinsic business is not sound. Very often they are. Many Chinese companies would be at the forefront of dynamism, growth and profitability in the world. But a US listing is not for them; at least not yet. There is a lot of grey in business in China, especially in dealings with the government. American exchanges require black and white; not grey.

Its far better to list in Shanghai and Shenzhen. If listing somewhere else is a must, there is Hong Kong. There is zero business logic in going elsewhere.  If you want to preen your feathers, then there are other ways of doing it. Listing in the US is a very bad idea.

There is a peculiar fall out to the situation. As the news of Chinese companies getting suspended or delisted grows, the short sellers are shorting every Chinese company . The same wildebeest stampede is now in the opposite direction - every Chinese company must be dodgy; so short them all. I think it would be entirely appropriate that  a few wildebeest be flown from the Serengeti and made to stand outside Wall Street. Bulls and bears are no longer the animals on stock exchanges ; its the wildebeest that's ruling the roost.

16 comments:

zeno said...

Boss, How do you come up with these? You should be a financial advisor to HNI. Pocket a good commision :P

Hopfrog said...

A few years back I thought I was getting some incredible deals on my Chinese stocks (US listed). Not only were equities (across the board) a good deal after the crash, but Chinese stocks also seemed to promise more growth. It was a great time to transition money market holdings into equity.

I didn't blindly buy them just because they were Chinese, I did a lot of research and the numbers all looked solid. P/E's were all solidly low, revenues were growing, and the firms were not highly leveraged. On paper they looked much better than the American companies I was also buying.

Almost every single Chinese stock I bought is underperforming, vastly underperforming. In hindsight I should have known better. As a China 'observer', I am no stranger to all the false reporting and manipulating of numbers that take place in the country. I bought snake oil.

I laugh every time I see a new report or commentary about someone fearing 'that China will take over the world'. A business culture as ethically bankrupt as the one in China will never 'take over the world'. A waking dragon.... downright laughable. As soon as China's cheap labor is no longer 'cheap', the dragon can go back to sleep.

There is no innovation and people are starting to view 'growth numbers' with a lot of skepticism. Really, other than taking advantage of low overhead, not much reason to put your faith or money in China and that does not formulate into the next 'great economic miracle'.

Vishal said...

Aha! I loved the 3rd last para. Indeed they want black and white but not many places have a situation of black and white, unless people have talent of turning grey into black and white - probably the way we do.

I hope to understand the story of bulls and bears (leave alone Wildebeest) some day leaving aside my frontal lobe. Btw, what does wildebeest imply?

gils said...

last line nachu...semma analogy

Ramesh said...

@zeno - HNI's are smart zeno - they would kick me to high heaven !

@Vishal - Wildebeest are notorious stampeders. Watch them trying to cross the Mara river in the annual wildebeest migration - there are more wildebeest killed in the stampede than by crocodiles.

@Gils :)

Kiwibloke said...

Not sure if this world will be a better place from the next generation when there is a prediction that the BRIC countries will rule the world. Don't get me wrong, the entire RIC economies is based on corruption, crony capitalism and downright intellectual dishonesty. I can claim to know quite a bit about India and a bit about China, have heard about Russia. (don't know much about B except that they make some of the best steaks in the world!)
PS: My adopted homeland typically comes in the top five on things like being corruption free, safety, work life balance, etc. (The other usual suspects in the top 5 are Scandinavian countries)Won't be surprised if it tops the list for naiveté.

Ramesh said...

@Hopfrog - Oh that's way too pessimistic Hopfrog. I can understand that the shares may not do well and I do agree that much of the hype of the competitive edge of China is hogwash, BUT

There are some clear strengths. The work ethic is amazing - very little slacking and laziness. The value of great infrastructure can never be overemphasised; nobody in the world has this. A culturally high savings rate will always enable capital formation. Sure, they won't take over the world, but I think we are yet to see the full extent of power that the Chinese are going to acquire.

But the soft skills - ethical integration with the world, diplomacy, global inclusion, true multiculturalism, innovation - a long long way to go.

Ramesh said...

BRIC will NOT rule the world. Nobody is going to usurp America's might either economically or politically, in a hurry. BRIC is just taking its natural place in the world order; at the expense of the disproportionately weighted old Europe.

As for your adopted country; of course its beautiful, safe, etc etc , but it weren't so damn far away, if there were a few more men and a few less sheep, if only they could play cricket at at least club level and if they can get rid of the awful cold and wind for atleast a few months, then ...... :)

Sandhya Sriram said...

Ramesh,

There is something that i dont understand here?

the Mighty America let these companies list through a backdoor route. they let people trade. people buy these stocks and let the chinese companies take back the money. then they delist these companies and leave the american investors high and dry...

Is it Chinese Vanity or American Insanity? who is losing money now.

But we are thankful to the Chinese and the Americans. Both the countries are so Close to Ramesh - China to Ramesh's Heart and America to Ramesh's Brain and them keeping active keeps our great Ramesh's Blogospace active and gives us the priviledge of the extra-ordinary perspective of a super genius - what say - Gils/ Zeno/ Deepa?

So me says - Hail US of A, Hail C of Hin of A.

Hopfrog said...

@Ramesh, Too pessimistic? Agreed. Probably the spurned investor in me talking. However, I don't agree with a couple of your counterpoints.

Work ethic. Agreed, this may be the one thing that keeps them a contender. But I'd bet my bottom dollar we'll never see them raise the championship belt.

Infrastructure. I don't think China's infrastructure is all that impressive. With a tightly regulated internet, it has one of the slowest internet speeds in the world which directly relates to ideas and information being exchanged at a much slower rate than the rest of the world. And on that note, China does not benefit from ease of access to the shared information in the West. Their highway system is incapable of keeping up with the growth of automobile purchases as evidenced by 9 day Beijing traffic jams. A couple of high speed trains (for the wealthy) and a mega dam that many now believe is causing more damage than benefit, does not a great infrastructure make.

Culturally high savings rate. I view this as a detriment. The Chinese are unwilling to put their capital into action, which I think you will agree is a key element of a dynamic economy. They would rather pour their capital into building empty skyscrapers and ghost cities like Ordos, than into startup capital for business growth and technological innovation.

I bet you can easily name several high quality brand names form various developed countries. Japan has countless electronics companies like Sony, Germany has its BMW's and Mercedes, Italy has its fashion designers, and America has countless brands that you can purchase all over the globe from Coca Cola, Ford, and McDonalds. Can you name me one Chinese brand product that is popular around the globe? Not made IN China, made BY China.

Sure, I am being pessimistic, but it's really only a reaction to the degree of optimism I view as misplaced.

Ramesh said...

@Sandhya - Thats the beauty of the American economy. Its free. Irrespective of nationality anybody can do business. And rules are enforced stringently for all irrespective of background. Some cheats will come, no doubt. But many many more innovative , world class, great companies will come from all over the world. The American investor has a chance to participate in the wealth creation of all of them. Hopfrog can invest in Infosys. But look at you and me - we can't invest in Apple, we can't invest in Google .....

@Hopfrog - Mmmm. I can see where you are coming from. I could debate a point or two, but overall there is much in what you say.

Hopfrog said...

@Ramesh, That's why I am such a big fan of your opinions and comments, you are willing to reconsider your positions. I know you've caused me to reconsider a few of mine in the past. For the most part I find that bloggers feel the need to defend their positions to the end, right or wrong. Few are confident enough to reconsider their opinions in the same public format in which they have expressed their opinions. Tip O' the hat to you sir.

Deepa said...

Facebook has this 'like' button, I was looking for one on a lot of comments here!

I was thinking on the lines of Sandhya's point. Seeing the solid reporting rules here, its almost a sacrilege to let in companies who can't hold their numbers together. And once u have them listed, one can't blame an average investor to put his money on them. I feel a lot of this comes from the American musing with China lately. There are some who have been struck by the Chinese phenoma, not really sure about how big the tide is. But if the tide is big they dont want to be the ones to be left behind.

With regards to bridging the gap across the oceans. The Asians (including us) really have lot to learn in terms of building stronger fundamentals in the economy.

Ramesh said...

@Hopfrog - Awww; that's so kind. Its my privilege to have such a keen insight commenter in you. Tip hat to you too.

@Deepa - Yes, but the violent swings on Chinese stocks has not go to do with believing the numbers. Your point on governance in the US is right. Its not perfect but its a damn lot better than most places in the world. If only they would adopt the European practice of separating the Chariman and CEO ....

hemarao said...

Interesting debate here.
I agree to what Sandhya has said.
"Is it Chinese vanity or American insanity?".
Wonder what Kipling would say now to' East is east and west is west, never the twain shall meet'...

Ramesh said...

@Hema - Ever the poet :)

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