In 2015, Thomas Williams was one of the three inaugural Morrison Scholars at the Australian Centre on China in the World (for more on The Morrison Project, see here). He is a member of the New Colombo Plan Steering Group and was previously an analyst at 3rd Wave Capital, a private family fund. He is interested in Chinese business, Australia-China relations, and broadening youth participation in the Asian Century.
Tom initially contributed to the work of CIW by writing, with Neil Thomas, a paper for the Centre’s A New Australia-China Agenda project in 2013 (see their essay ‘Australia Dreaming‘). For Neil Thomas’s contribution to The Morrison Project, ‘Rhetoric and Reality in Xi Jinping’s Australia Policy’, see here. A third Morrison Scholar, Will Zou 邹述丞, has co-authored with Ryan Manual (a CIW Postdoctoral Fellow and the co-founder with Geremie R Barmé and co-ordinator of The Morrison Project) a study of Xi Jinping’s use of classical Chinese expressions and thought in the articulation of Chinese foreign policy. That paper will also appear in these virtual pages. — The Editors
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Red Flags in Tiananmen Square. Photo by Victoria Reay
Australians have always been a bit jittery about foreigners. Chinese companies have been portrayed in the Australian media as a looming spectre threatening to ‘take over’ the economy. However, most critics are unaware of how Chinese companies actually perform. This is especially true of Chinese companies listed on the Australian Securities Exchange (ASX).
An examination of these Australian-listed Chinese public companies reveals a simple finding, if one contrary to the ‘China threat’ hyperbole in the media: ASX-listed Chinese companies are major underperformers. They are bad investments, generally loss-making, and often not compliant with ASX rules. Even in the months prior to China’s ‘Black Monday’ in mid 2015, when prices on the Shanghai and Shenzhen Stock Exchanges were soaring, ASX-listed Chinese companies were adrift in the financial doldrums. They certainly aren’t businesses that seem likely to dominate Australia, nor are they cash cows for Australian investors.
To demonstrate this underperformance, I began by identifying all ASX-listed Chinese companies that predominantly operate in China and at least half of whose board or executive members were ‘Chinese people’ — that is, people of Chinese ethnicity who received secondary or tertiary education in China and/or spent a significant portion of their career in the People’s Republic. To do this, I used the ASX website to screen companies based on the names of the directors, then filtered them based on their place of operations crosschecked against Bloomberg data sets and Annual Reports. Finally, I checked the background of company directors on their company website or latest reports. This process led me to conclude that, as of April 2015, of the 2,177 companies listed on the ASX, twenty-three could be identified as Chinese companies.
Red Flag on the Great Red Wall. Photo by Peter Rowley.
In 2015, these twenty-three companies had an average market capitalisation of AU$56.36m, placing them in the range of micro- to small-capitalisation stocks. On average they have been listed on the ASX for 7.8 years, with fourteen of them listing in the last five years. The most common structure of these companies is to have a publicly-listed Australian holding company that controls a Hong Kong incorporated subsidiary, which in turn controls companies incorporated in the mainland that operate the business. The companies operate in a wide range of sectors, including consumer durables, apparel, energy, materials, media, software and services, and retailing.
Chinese companies underperform. Average earnings per share (EPS) were -AU$0.105, -AU$0.06, and -AU$0.11 over the previous five, three, and last financial periods. Only twenty-six percent of the companies had a positive EPS in their last financial period. Factoring in variations caused by tax, significant items and currency changes, at the profit-before-tax line (PBT) for the last reporting period of each company, fifty-seven percent of companies were unprofitable. Of the remaining profitable firms, fifty percent had declining revenues and twenty percent were either stagnating or had been listed for such a short amount of time that a trend was hard to determine. Of the very few remaining that were actually growing at the time of their last reports, one, an oil and gas business, was under investigation by the Australian Securities and Investment Commission (ASIC) for misappropriation of funds; another, a mobile commerce platform provider, had seen its share price drop sixty-five percent since its listing in August 2013; and finally, the third, an integrated supply chain manager for petroleum, had seen its share price fall 37.5 per cent since its listing in February this year. Thus, even these potentially growing businesses would have made for painful investments.
Unsurprisingly, poorly performing businesses generate poor investment returns. In terms of total shareholder return (TSR), Chinese companies have consistently failed to increase shareholder value. TSR provides a measure of how an investors’ equity has appreciated or depreciated over time. TSR is calculated as the sale price, less the purchase price and dividend payments, divided by the purchase price. Only nine per cent of Chinese companies delivered a positive TSR over the last year, thirteen percent over the last three years, and seventeen percent over the last five years. The average five-year, three-year, and one-year returns for the group were -20.7 per cent, 4.4 per cent and -29.3 per cent. These returns were well below those recorded by the Australian All Ordinaries Index, which tracks the largest 500 companies in the Australia equities market, 41.8 per cent, 32.7 per cent and 32.2 per cent over the last five years, three years and one year respectively.
There are a number of reasons for this poor trading performance. Chinese companies have typically not engaged with the market well. Chinese companies are notoriously bad at complying with ASX rules and reporting; thirty-five percent are currently suspended and forty-four percent have been suspended in the last six months for various infractions or concerns regarding accounts. It should be noted that a minority are adept at corporate marketing, including 99wuxian, TTG Fintech and Vmoto. However, they are the exception rather than the rule.
Lack of engagement with investors’ concerns is in part driven by the ownership structure of Chinese companies, with fifty-two percent of companies having a single majority holder. Of the ten companies listed in the last three years, on average less than ten per cent of stock was issued at IPO, meaning all shareholders of listed stock have little to no influence over the company. In extreme cases, less than one per cent of the companies have been offered during the IPO. This type of ownership structure, especially where executives are also the major shareholders, is closer to that of a private rather than public company, and exposes minority investors to the risk of being mistreated by majority interests. Additionally, the limited amount of tradable shares in the company exposes the share price to being easily manipulated and unreflective of the company’s true market value, making companies even less attractive.
Concerns over corporate governance are heightened by the lack of veracity in the accounts of Chinese businesses overseas. Chinese companies listed outside of the PRC have been infamous for fraud. The barefaced chutzpah of such corporate swindles as Sino-Forrest, a Canadian-listed forestry company that ballooned to C$6b in market capitalisation before being discovered to not actually hold the assets it reported, has left many investors questioning if accounts can be trusted.[1] This is exacerbated by the fact that global accounting firms have failed to ensure their local Chinese auditors consistently comply with international standards.[2]
ASX-listed Chinese companies have made for good investor war stories. They come complete with all the common crowd-pleasing tropes. CEOs are dragged to court by ASIC on allegations of misappropriation of funds.[3] Chairwomen are embroiled in Communist Party corruption crackdowns.[4] Startlingly forthright company names such as Mega Rich International Pty Ltd, exotic places of operations as far flung as western Xinjiang, and a heavy weighting of British Virgin Island-based shareholders add further to the air of mystery and intrigue. However, they don’t make for good investments. Chinese companies are as speculative and inconsistently run as any other micro- to small-cap stocks that make up the ASX Emerging Companies Index, and they should be treated as such.
Whilst the sector could be improved if the ASX more stringently enforced its guidelines, if ASIC puts more pressure on auditors to lift transparency, and if companies could help themselves by ensuring better reporting and investor relations, a looser shareholder register, and closer adherence to corporate governance principles, the only real way to improve this situation is to find and list better businesses.
Australia professes to have world-class expertise in finance, which could be used to our advantage if we worked with Chinese companies to identify the right investments. Chinese companies are not a looming spectre threatening to take over the Australian economy painted by the Australian mass media. Despite the experience to date, they are an opportunity for Australians to gain better access to Chinese growth, both by collaborating with Chinese companies investing in Australia, and through the additional opportunities this might bring for Australian businesses wishing to invest in China.
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Notes:
[1] Barbara Shecter, ‘Sino-Forest execs deny fraud, call OSC allegations a misinterpretation of Chinese business practices’, Financial Post, 2 September 2014.
[2] Michael Rapoport, ‘SEC, Big four Accounting Firms in China Settle Dispute’, Wall Street Journal, 6 February 2015.
[3] Eloise Keating, ‘ASX-listed oil and gas Company collapses after ASIC investigates $13 million IPO’, Smart Company, 8 May 2015.
[4] Roger Smeed, ‘ASX Notification — For Immediate Release’, Xiaoxiao Education Ltd, 8 January 2015.
