Domestic stock market turmoil may trigger more overseas initial public offerings

Turmoil in China's domestic stock market may prompt more Chinese companies to consider listing overseas in mature markets like the United States and Europe, where share prices generally have less volatility, experts say.

Some Chinese firms looking to make an initial public offering, or IPO, may be scarred by the recent price falls on China's domestic exchanges, and instead look to Western stock markets where market dominance by institutional investors leads to less speculative trading.

Shandong-based producer of specialty chemicals GTS Chemical Holdings listed on London Stock Exchange last year. Provided to China Daily

"The rapid fluctuations in stock prices in China's A-share market are quite harmful for companies, because it makes the cost of secondary raising unpredictable," says Roy Su, chief finance officer of GTS Chemical Holdings, a Chinese company listed on the London Stock Exchange.

The company's IPO story may provide inspiration to many Chinese companies looking to overseas listings. The Shandong-based producer of specialty chemicals, lubricating oil and recarburizers has seen its share price experiencing strong growth on the LSE, rising from 36 pence (56 US cents; 50 euro cents) at the IPO in August 2014 to around 56 pence now.

"From the company's perspective, we would much prefer steadily growing share prices, which reflect the fundamentals of companies' growth," Su says.

"Such an environment would also encourage our investors to be long-term investors who believe in the long-term growth of the company as opposed to short-term investors wishing to benefit from rapid price fluctuations," he says.

Since its June 12 peak, the Chinese stock market fell by 30 percent and lost value equivalent to 1.5 trillion pounds, which is 10 times the size of Greece's annual GDP.

This hit domestic and international investors' confidence, and some industry insiders now expect more companies to list overseas, following a trend that has increased in recent years. The benefits of listing overseas include brand reputation, ease of comparison with industry peers, and a solid foundation for overseas expansion.

Already 53 Chinese firms are listed on the LSE, and 25 Chinese companies trade on Frankfurt's Deutsche Borse, of which 16 are on the Prime Standard of the exchange, which is known to have some of the world's most stringent corporate governance rules.

"All Chinese companies that are listed in the Prime Standard of Deutsche Borse have opted for the highest transparency standards in Europe. A lot of these Chinese companies have their peer groups in Germany and find well-informed analysts here. Chinese companies also value the European currency as well as the good reputation of being listed in Germany," according to a Deutsche Borse statement.

Derrick Woolf, a non-executive director of Jiasen, a Quanzhou furniture firm that listed on London's Alternative Investment Market in June last year, says he believes more Chinese companies will seek listings overseas, because international stock exchanges' stringent corporate governance regulations would boost their brand value.

Such brand value would help the Chinese firms do business in their domestic markets, as well as help them strike partnership deals with overseas companies, Woolf says.

Jiasen, which raised 2 million pounds through its AIM IPO, has since entered discussions with Western companies over possible partnerships in China, Woof says.

The overseas listing allowed Jiasen to purchase a piece of land in China from the local government at discounted price, and use it to set up a new factory. This is because Jiasen's London listing has helped give credibility to the firm, Woolf says.

Another benefit of listing in a market like AIM is stability of valuation, because such a market is generally driven by institutional investors who hold their investment for the long term, Woolf says.

This is very different from China's domestic stock markets, which are dominated by retail investors who make decisions less rationally and tend to make more trades on a short-term basis, with their decisions greatly influenced by market sentiment as opposed to company fundamentals, he says.

"From the perspective of a quality company, as they steadily grow and they meet investor expectations, their share price should rise steadily as more investors buy into their stocks over the long term," Woolf says.

"Overall, China has good, valuable and growing companies, and IPOs of these should be possible in London," says Ken Rumph, CEO of the consulting firm Clean Technics.

Rumph says successful Chinese companies listed in London generally would work to attract and maintain a wide group of institutional investors, as the work does not stop at the IPO.

He says one example of a Chinese firm that has achieved great benefit by listing in London is Renesola, one of the world's leading solar photovoltaic manufacturers, which initially started trading on the LSE's AIM in March 2006, raising $50 million followed by a further $120 million soon after.

"Renesola then raised more money in New York and eventually delisted in London but remains listed in New York. Although its share price has followed the same roller coaster ride as other solar stocks, investors in the IPO had the opportunity to make significant profits during the boom years," Rumph says.

Su, of GTS, adds that strong growth of a Chinese company's share price will be achieved after the company takes the time to prove to shareholders that its revenue will achieve forecasts and the company keeps its promise to pay dividends, as has been demonstrated by GTS Chemical Holdings.

"Our key advantage is that the company's revenue has experienced a strong growth, that we have strong corporate governance and transparency, we have good communications with investors, and that we have kept our promise of dividend to them," Su says.

According to the company's annual report, sales in 2014 reached 704.6 million yuan ($113.5 million; 102 million euros), a 45.9 percent growth from 482.9 million yuan in 2013.

Su says the decision to list in London was due to the exchange's strict corporate governance requirements, which further helps GTS to build up better brand reputation and trust for its distributors.

"In the lubricating oil sector especially, having a foreign listing really helps to send out the signal that we are a reputable company, and we have seen this effect since our IPO," Su says.

GTS also used the listing process as an opportunity to strengthen its corporate governance to a much higher standard. It has created a board of directors, of which four are non-executive directors, with three from a financial background, so that they could ensure the company's financial statements are prepared to the highest standards.

"Our board of directors would have meetings every month, so there is absolute transparency between us. We also keep our non-executive directors informed of the latest updates in the company, so that they can communicate our message to investors very accurately," Su says.

The company announced its intention to pay a dividend to shareholders at the time of listing, which it has confirmed this year. The company intends the dividend to be about 5 percent of the price at which its shares were placed when it listed, so, as the shares were placed at 36 pence that implies a payout of around 1.8 pence.

"The fact that we have kept our promise boosted investors' confidence in us," Su says.

At the time of IPO, GTS Chemical Holdings raised 3.23 million pounds. Su says this was below the company's forecasts, although in the future his managers may consider secondary fundraising when the time is right.

Su says that he believes Chinese companies listed on overseas exchanges would continue to be attractive in the long term because they enable Western investors access to China's high economic growth.

"Although the Chinese economy is slowing, its growth is still rapid compared to many Western economies, so the China story would still be attractive to Western investors. From the company perspective, we just have to make sure that we communicate our message well," he says.

cecily.liu@chinadaily.com.cn

(China Daily European Weekly 07/31/2015 page8)