Overseas listings have seemingly lost their appeal to many Chinese companies. Some are now taking their publicly traded shares private after realising that it takes more than just a glossy annual report to stay listed.
Some Chinese companies, especially those tarred by allegations of fraud and misconduct, apparently feel that they are stuck in a vicious circle — they release the least information possible for fear of spooking investors further, while investors, lacking sufficient knowledge, respond to any negative news by selling their holdings.
The most likely companies to go private include family-run businesses or those with a relatively small number of controlling shareholders. Stock exchanges in the US will see the most delistings, according to Kroll, a risk consultancy.
Indeed, there are incentives for firms to quit US exchanges and relist in other markets like Hong Kong. “Hong Kong-listed stocks are trading at a 40% to 50% premium to those listed in the US, although the spread has narrowed from a 70% premium a year ago,” said Mark Tobin, a California-based analyst at Roth Capital Partners, an advisory firm.
“We continue to view privatisations as an ongoing trend and expect additional transactions during 2012, driven by a number of catalysts, including a loosening of China’s credit markets and increased interest from companies,” he said.
Privatisation creates growing opportunities for due diligence firms. According to Colum Bancroft, managing director of Kroll’s Greater China financial investigations practice, there are a lot more clients, including private equity firms and auditing committees of listed companies, asking for a financial health check for target companies.
“Their main concerns are the asset quality of the target companies and how reliable the numbers [in the financial statements] are. Since footnoting [supplementary financial and non-financial disclosure] requirements are not very specific in China, it creates lots of potential loopholes,” said Bancroft.
China has the second-highest proportion of companies affected by fraud, exceeded only by Africa in 2011. Chinese companies traditionally have high staff turnover, Kroll said in its global fraud report, which can make it harder to catch and prevent fraud. At the other end of the payscale, China also has a very high rate of fraud perpetrated by senior executives, which are even harder to prevent.
Once an alleged fraud is detected it is hard for institutional investors without an on-the-ground presence in China to find out what exactly is going on. “Investors often respond to negative news with selling, selling and selling, which may not be the appropriate action in some cases,” said Violet Ho, senior managing director of Kroll's Greater China business intelligence practice.
While the accuracy of financial statements may have been questioned by many, the lack of disclosure of non-financial information is also a big issue. Chinese executives often believe the less information they disclose, the fewer mistakes will be found.
To make the situation worse, many Chinese companies don’t see any incentive to engage with investors to repair their damaged reputation, noted Ho. “In some cases, key principals of listed Chinese companies have this kind of sentiment: It’s a business that I founded, I built and in which I still own a big chunk. Why should I let anyone else interfere with how I run the business.”
Indeed, some Chinese companies have decided to delist simply because they prefer to operate in the entrepreneurial way they did before becoming listed.
Jack Ma, chairman of Alibaba, said the motivation for delisting its business-to-business unit is to “be free from the pressure of market expectations, earnings visibility and share price fluctuations”.
That gives a heads-up for Chinese companies planning for an IPO — it is worth questioning whether they are capable of managing the pressure of market expectations.
