China's M&A spree suggests the country's corporate executives fancy themselves, like US President Donald Trump, as experts in the 'Art of the Deal'. But a high-profile spat involving a fallen giant of the Chinese e-commerce scene suggests the country's business leaders are picking up tips from the Twitter-loving Commander in Chief on investor communication, as well.
Instead of taking comments to White House press briefings, Trump loves announcing policies on social media. In a similar fashion, the chairman of a US-listed Chinese company decided, in the face of fierce investor attacks, to take to Weibo – the Chinese equivalent of Twitter – to address questions from the firm’s US-based investor.
The lesson for those holding stakes in Chinese companies? Register a Weibo account, follow the executives of the firms in your investment portfolio on Weibo, and of course, have someone who can read Chinese characters – even if the firms are listed on non-Chinese exchanges.
Jumei International Holding, China’s largest online cosmetics retailer by gross merchandise volume (GMV), has been busy of late venturing into some of the hottest business verticals in China, including portable power bank sharing and popular IP-based drama production. That's despite the fact a plan to take the company private, announced some 18 months ago, has yet to come to fruition.
But just as it closed the acquisition of a frontline player in the power sharing sector in the end of August, an activist shareholder in the US hit out, accusing the chairman of misusing the firm’s – or shareholders’ – money on these “questionable non-core targets” and demanding the firm end the privatisation debacle and return $225 million to investors in special dividend.
In an August 29 open letter to Jumei’s Chairman Leo Ou Chen and co-founder Yusen Dai, as well as Neil Shen of Jumei’s investor Sequoia Capital (China), Heng Ren Investments, a Boston-based China-focused asset manager, made a series of criticisms.
Hang Ren said the company's management should take full responsibility for the fiasco over the past 18 months since the buyout bid was announced in February, 2016.
Since the go-private announcement, “…a series of mistakes has caused the stock of China’s leader in online cosmetics retail to collapse by as much as -45.2%, while online shopping is booming in China. During Chairman Chen’s 18-month debacle, $397 million in Jumei’s market value has been destroyed [see graph below], an absurd amount considering the company’s current market value is $479 million” [as of the close on August 25], wrote Peter Halesworth, managing partner of Heng Ren, in the letter.
The mistakes, as Halesworth put it, include Chen’s bid to invest $14.3 million in the production of a television drama series and $44.8 million in Jiedian, a start-up rental service for portable power banks for cell phones.
The letter also pointed out that Jumei had discontinued “meaningful” shareholder communications for 22 months. “Despite still retaining an investor relations firm in the US and until recently a dedicated IR officer, all paid for by shareholders, there is no forum for investors to query Jumei’s management about the value of these questionable investments, which appear irrelevant to the core online cosmetics retail business and a waste of valuable shareholder cash,” he wrote.
“Disregard for US investors”
In the face of investor doubts, Chen wrote in a Weibo post on August 30 that “there’s questioning around Jumei’s investment in the movie industry and Jiedian, claiming they are our non-core business areas. But in fact, it’s all about customer traffic, which is increasingly assembled to mobile apps and will be more and more expensive to acquire. Acquiring customer traffic via investment into these apps, which is more cost effective, is the right operation strategy of a corporation.”
Later, Chen posted a more formal letter on Weibo, adding the firm did not choose to distribute cash dividend because the management makes up the biggest shareholders in the firm and it would be “selfish” to take the money.
In an emailed reply to FinanceAsia, Halesworth firstly thanked Chen for his efforts to address investor concerns on Weibo. But with a tocuh of irony, he wrote: “It has been 22 months since US shareholders of Jumei, an international public company listed on the NYSE, have heard from you [Chen].”
A posting on a Chinese social media platform, Halesworth argued, should be a supplement to, not a substitute for, a scheduled conference call for US-based investors. And given the gap in direct communication stretches 22 months, there is a lot of information to catch up on which should take more than a Weibo posting, Halesworth said.
“For example, Jumei’s missing year-to-date 2017 financial results speaks volumes. As of now Jumei shareholders are ‘flying blind' on the company’s performance this year. The financial results need to be filed with the US regulator of public companies, the US Securities and Exchange Commission, not merely posted on Weibo, as you well know,” Halesworth said.
Halesworth declined to disclose the size of his firm's stake in Jumei, citing policy requirements. “We are an investor that has been frustrated by Jumei's lack of transparency and disregard for US shareholders, and we took the step to become an activist shareholder in this case,” he said.
Chen also claimed the Jiedian investment had proven tremendously successful – “it has captured 80% share in the battery power bank within three months”.
That claim “is a surprise to me and others. I believe it also will be a surprise to the giant Tencent-backed competitor, and other rivals,” Halesworth said. Tencent invested in Xiaodian, another league player in the sector; and another rival Laidian is backed by SIG and Redpoint Ventures China and partners with Ant Financial. A founding executive at a power sharing company told FinanceAsia Chen’s claim of market share was doubtful and pointed out Chen didn’t specify which measurement he was using. The announcement didn’t cite any third-party data.
What’s left unsaid is the total price tag for Jiedian investment, Halesworth added. “What’s the value of this start up? What are the expected returns?” Likewise with Jumei’s media investment, which will see it produce a TV series based on a book called Heart to Heart, Halesworth asked: “What are the expected investment returns on this television series? How does this investment benefit Jumei shareholders?”
“It is often what is left unsaid that matters most,” he summarised.
On another note, Jumei’s directors and executives own collectively 40.5% of Jumei as of the end of 2016, but the holders of the other 59.5% “may not see a $1.50 special dividend to repair the damage to their finances as being selfish,” he said.
Finally, he demanded an update on the status of the buyout proposal from Chen, co-founder Dai and Sequoia. The three in February last year proposed a go-private transaction of $7.00 per share.
Dai has tendered his resignation from his position as a director in the firm for personal reasons, Jumei announced on July 27. He joined ZhenFund, a star venture capital firm in China and one of the investors in Jumei, as a partner.