Monday, July 4, 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.