Why China stock prices go kaput on German bourse

Germany is China's biggest trading partner in Europe, but the close trade ties haven't done much to help Chinese companies listing on the Frankfurt Stock Exchange.

One prime example is Beijing-based ZhongDe Waste Technology, whose shares have plummeted 90 percent since the company went public in Germany's financial capital in 2007. The company designs, finances, constructs and operates electricity-generating plants burning waste. It has more than 200 projects in 13 Chinese provinces.

In theory, it was an ideal stock when it debuted. It embodied China's drive to develop cleaner-burning fuels and protect the environment, and it offered European investors the chance to buy into China's rapid-growth story.

Sadly, the outcome was quite different. Indeed, most of the shares of the 25 Chinese companies listed in Frankfurt have fallen sharply from their initial offer prices.

"The situation has been mainly caused by the global financial crisis and by the negative publicity of financial fraud scandals related to Chinese companies listed in the US," Wu Jianhong, chief representative officer of Deutsche Borse, told Shanghai Daily.

The office in Beijing, set up at the end of 2008, has provided a major impetus for the increased numbers of Chinese companies applying for IPOs in Frankfurt in the last six years.

Many mid-size and smaller Chinese companies seeking access to capital markets were frozen out of domestic exchanges by a one-year suspension of mainland IPOs. That ban was recently lifted, but hundreds of companies seeking approval to proceed with domestic IPOs are now in a backlog that may take years to clear.

That has turned the focus of IPO-seekers to offshore markets. The most popular have been Hong Kong and New York, but the high cost and complexity of the listing processes there have made alternative exchanges like Toronto and Frankfurt more attractive.

"Germany is strong in and familiar with manufacturing, engineering and renewable energy, so a lot of companies related to those sectors are more suitable for a listing at the German stock exchange in Frankfurt," said Oliver Kuan, head of Sustainomics, a Shanghai-based IPO advisory firm and chief financial officer of one of the Chinese listed companies in Germany.

The approval process in Frankfurt is simple, he said, and the legal deadline for prospectus scrutiny is only 20 working days.

International profile

"Chinese companies listed in Frankfurt are mainly small and mid-sized, and are seeking to lift their international profile," said Yu Xiaofan, a Deutsche Bank analyst. "It is relatively easier and faster for companies to get listed there. But if something happens to hurt investor confidence, all China-concept stocks get hit."

In addition to a series of accounting irregularities involving New York-listed Chinese companies in recent years, China's corporate image has been further tarnished by recent reports of a major commodities trading scandal and the current uproar over out-of-date meat supplied to foreign fast food chains operating on the mainland.

Kuan said it is often hard for foreign investors to differentiate between good and bad Chinese companies.

"It has come as a big cultural shock for many Chinese companies listed overseas," said Jiang Yachen, chief financial officer of Powerland, a Guangzhou handbag and luxury accessories maker listed in Frankfurt.

The company's share price has dropped about 85 percent since it first went public in 2011.

"Most Chinese companies care only about the IPO itself," said Jiang. "Once they are launched, that's the end of the road for them. But foreign investors care more about post-IPO performance and how companies operate and produce profits, and most importantly, how you communicate to your shareholders."

Many Chinese companies, especially family-run firms, don't have the knack for international communications and prefer to keep "the dirty linen" hidden when problems arise.

"All companies listed in Frankfurt have English-speaking chief financial officers, but as they often join just prior to the IPO they require time to gain deep insights and to build trust within both the investor community and within the company," said Kuan.

Only a handful of the Chinese companies listed in Frankfurt have websites, even though the exchange requires there be one in either English or German.

Only five out of the 25 companies listed in Frankfurt responded to Shanghai Daily's request for more information. Few followed through. The investor relations departments often said they couldn't provide information and didn't know whom to contact.

"Right now, the situation is quite pessimistic," said an industry insider, who declined to be identified. "Many foreign investors have lost trust in Chinese companies, and some Chinese companies feel they have been unfairly blamed for problems in the past."

It has been a hard, slow learning curve for Chinese companies to come to grips with post-IPO maintenance of their share prices. One company, China Specialty Glass, has hired a German firm to handle its financial and investor relations communications. Its share price has fallen 80 percent since it listed in Frankfurt in 2011.

"At the moment, Chinese companies have a bad reputation within German mainly due to missed publication deadlines for financial reports and curious management board issues," China Specialty Glass said in an email response to Shanghai Daily.

"Besides cultural differences," the reply continued, "Chinese companies are faced with differences in laws and regulations between China and Germany. China Specialty Glass encountered some disagreements during an audit process, which led to a missed deadline for financial reports. We are doing out best to resolve all open issues with our auditors as soon as possible."

Two Chinese companies are reportedly planning to proceed with IPOs in Frankfurt this year.

When German Chancellor Angela Merkel led a trade mission to China early in July, both the Chinese and German sides stressed the "special relationship" between both countries and pledged to strengthen ties. Chinese companies listed in Frankfurt will be hoping some of that goodwill spills over to their share prices.

http://www.ecns.cn/business/2014/08-04/127655.shtml