By Chan Quan Min
In the first part of our series, KiniBiz examines the close to a dozen China-based companies listed on Bursa Malaysia. We detail the history behind their arrival on Malaysian shores and explore the complex relationships they share with their local partners. We speak to industry insiders and discover if perhaps Chinese stocks have been unfairly misjudged.
As early as 2006, the Securities Commission relaxed listing regulations, paving the way for foreign-owned companies, even those with their entire operations abroad, to list on Bursa Malaysia, the local exchange.
The Securities Commission chairman at that time, Zarinah Anwar hoped that “liberalisation would promote cross-border linkages with other markets through dual-listings.”
“Hence, we welcome large and profitable foreign-owned corporations from jurisdictions having comparable laws with Malaysia to list on Bursa Malaysia.”
Back then, the rational was, integration with global capital markets would improve the efficiency of the local market. More importantly, it was expected that the local bourse would benefit from an expanded pool of high-quality stocks, surmised a 2008 report by the Oxford Business Group.
This wasn’t a movement that was restricted to Malaysia; major stock exchanges around the world, from Singapore to Hong Kong to New York had long warmed to the suggestion of cross-border listings.
If anything, the Securities Commission was at that time, cautious to state only respectable companies from jurisdictions with comparable laws could be acceptable to list on the local bourse. And even then, only the ‘large and profitable’ were welcome.
Wu Qingquan, CEO of XingQuan and Selvarany Rasiah of Bursa Malaysia
It was not until 2009, or three years later that Bursa Malaysia welcomed its first true cross-border listing through the IPO (initial public offering) route. XingQuan International Sports Holding Ltd, a manufacturer of rubber soles and sportswear, based in the People’s Republic of China, and incorporated in Bermuda, listed in July that year.
This first listing was followed by a slew of cross-border listings. The sudden interest from foreign companies, especially China-based consumer goods manufacturers, coincided with efforts to internationalise the Malaysian capital market.
This was the result of, according to the literature, a 16-month long effort, which began in 2008 to encourage more companies to list on the exchange, both local and foreign.
In October 2009, Bursa Malaysia and the Securities Commission announced the completion of an overhaul of the listing criteria for primary and secondary fund raising. Corporate governance and investor protection standards were changed from a merit based to a disclosure based approach. All this, it seemed, was in preparation for the internationalisation of the local bourse.
In the two and a half years since, up to January of this year, as many as nine China-based companies, with operations solely in China concluded successful listings on the Bursa main market through the IPO route. For comparison purposes, during that period just over 50 locally incorporated firms listed on the main market of Bursa Malaysia
Much earlier, a further two firms, similarly based in China achieved Bursa listings before 2009, but through the reverse takeover mechanism.
Accessing foreign capital markets
Local broking houses have long offered even the average investor the chance to buy into companies listed on stock exchanges overseas. It is as simple as opening a foreign trade account with a local broker.
A popular online broking service, HLeBroking lists six overseas capital markets Malaysians with a foreign share trading account can access. They include the usual suspects, Singapore, Australia, Hong Kong, Thailand, the United States and the UK.
Before they can offer a foreign trade service, local broking houses need to establish point-to-point connections with brokers in the markets they want to enter. Local brokers have easier access to the stock exchanges of our closest neighbours, Singapore and Thailand through the Asean trading link.
One glaring omission from the lists of overseas stock exchanges open to Malaysian investors are the Chinese stock exchanges of Shanghai and Shenzhen.
Direct entry into Chinese capital markets is notoriously difficult due to restrictions placed on the free movement of money by the Chinese government. Foreign ownership of shares traded on the Shanghai and Shenzhen exchanges are generally not possible if not severely restricted.
China-based cross-border listings are common the world over, from exchanges as diverse as Canada to again, the usual suspects, New York, London and Singapore. In Hong Kong, investors are allowed to purchase H Shares, a specific class of shares in Chinese companies not convertible with the mainland equivalents.
In Malaysia and worldwide, stock exchanges embraced China-based cross-border listings as an opportunity to offer exposure to one of the most, if not the most dynamic economy in the world.
In the same vein, China-based companies listed on Bursa Malaysia offer the local investor the choice of exposure to the Chinese economy. However, the options are not quite as diverse, with only 11 China-based companies, according to information compiled by KiniBiz, listed on the local bourse.
In actual fact, nobody could be more enthusiastic about the increasing liberalisation of capital markets worldwide than the Chinese themselves.
Chinese companies at last count, completed the largest number of international listings, at up to 30% of all cross-border listings globally, according to PricewaterhouseCoopers estimates.
The handshake
Chan Fung @ Kwan Wing Yin
“Chinese firms face significant challenges if they want to raise capital back home. Listing in Shanghai or Shenzhen is close to impossible because of the competition,” said the chairman of China Stationery Ltd, Chan Fung @ Kwan Wing Yin.
“Also, we have chosen to have our holding company incorporated overseas. As such, we are recognised by the Chinese Government as a foreign entity and are disallowed from listing in China.”
Chan said he was enticed to consider a Bursa listing after getting a chance to meet Prime Minister Najib Razak when the PM visited China back in 2009 to mingle with business leaders. One firm handshake later, Chan made up his mind that Malaysia was the place to take his plastic stationery business to the world stage, he recounted.
China Stationery listed on the local bourse in January 2012 with the help of local partners. China-based firms often seek the help of local partners to help smooth the negotiations with local regulators, underwriters and fund managers.
In fact, Bursa listing regulations require foreign listings to appoint an ‘agent or representative’ responsible for communication between the company and Bursa Malaysia.
Bursa listing regulations that apply to local companies are similarly enforced for cross-border listings. Chinese companies that are seeking a listing in Malaysia often tie up with Malaysian partners to help them cut across language, regulatory and cultural differences.
China Stationery sought the help of WG Capital Sdn Bhd to assist with their IPO on Bursa Malaysia. On their website, WG Capital described themselves as a firm that “strives to invest in high growth companies from China that demonstrate competitive advantages.”
WG Capital’s CEO, Lua Choon Hann, as described by his profile on the company’s website boasts experience in listing as many as four China-based companies on the Singapore stock exchange.
Chinese stocks take a tumble
Fast forward to 2013, and our nine China-based cross-border listings on Bursa Malaysia have taken a tumble, languishing at extremely cheap valuations. On average, China-based Bursa shares are now trading at a third of their IPO price.
Research analysts at major investment banks are quiet. Many of them had long pulled the plug on their coverage of China-based Bursa listings.
In early May, HB Global Ltd (formerly Sozo Global Ltd) made the headlines for discrepancies in their financial reports. According to news reports, the company’s external auditors claimed they were “unable to satisfactorily and independently substantiate the bank balance of the subsidiary company.”
The company later slipped into Practice Note 17 (PN17) category.
Industry professionals contacted for this article have said Chinese stocks are suffering from an image problem. There are fears Bursa listed Chinese stocks are going the way of others on international exchanges such as the New York stock exchange, which has seen a spate of de-listings. As many as 493 Chinese companies listed on the NYSE have been de-listed, according to data by Shenying Wanguo and The Wall Street Journal.
Across the Causeway, Chinese companies listed on the Singapore stock exchange have been wracked by corporate scandal. Things were beginning to look ominous for Chinese stocks in Malaysia.
Tomorrow: Corporate finance with Chinese characteristics
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