Bursa’s China stocks remain a hard sell

Since 2009, eight foreign companies, all from China, have listed on Bursa Malaysia.

The first was XingQuan International Sports Holdings Ltd and the latest, China Automobile Parts Holdings Ltd (CAP), will be listed on the Main Market at the end of this month.

Already, there is scepticism about the auto parts maker’s share price staying at its initial public offering (IPO) price for long. In previous cases, the share prices of China IPOs on Bursa fell after their listing, although the shares were oversubscribed.

CAP’s IPO is being valued at nearly six times earnings based on the IPO price of 68 sen. By comparison, the other China stocks on Bursa are trading below three times.

A random check of Bursa’s China stocks shows that all eight of them are cash-rich with minimal borrowings (see chart). Their stocks are also at a discount to their net cash per share, implying that investors are buying the companies’ business and assets for free.

But even that is not enough to entice investor interest. Neither is their earnings growth.

The depressed share prices of these China stocks have made them easy takeover targets or privatisation candidates.

Some investment analysts say it is pointless to hoard cash as this shows lack of efficient capital management.

They concur that companies should declare special dividends instead to reward shareholders, which may turn the China stocks into high-yield stocks. Doing so may make them more appealing to investors.

“We think the perception of China-based stocks has always been obscured by a lack of understanding of these companies,” says Anuar Omar, AmInvestment Bank Bhd’s director and head of corporate finance. “The perception of China-based companies listed in Malaysia has also been affected by the S-chip debacle in Singapore.”

Be that as it may, Anuar is optimistic such perception will change in the future.

He stresses that AmInvestment Bank takes great care in evaluating potential listing candidates to ensure that the companies the group brings to the market have strong fundamentals.

An executive with another investment bank says: “Most of the time, investors get excited about the ventures of Malaysian companies in China. But they do not look at the companies that are based there and which are well positioned to ride the economic growth.”

The lack of interest in China stocks could also be due to the herd mentality of fund managers, the executive adds. “Most of them are rather conservative.”

Apart from misperception, K&N Kenanga Holdings Bhd’s group managing director Chay Wai Leong believes the weak share price performance of the China stocks on Bursa is also due to concerns about the Chinese economy amid the global economic slowdown.

“The decline in the share prices of these Chinese companies is very much in line with the performance of those listed on the Shanghai, Shenzhen and Hong Kong bourses. China was one of the worst performing markets last year,” says Chay.

The benchmark indices of the Shanghai Stock Exchange and Shenzhen Stock Exchange have headed south in the past two years. In early December last year, the Shenzhen Composite Index was down 46% since late 2010 while the Shanghai Composite Index was reduced by one-third, down from 3,050.5 points in mid-2011 to 2,125.7 points.

However, sentiment there turned bullish in late December. The two exchanges as well as the H-shares index in Hong Kong staged a strong comeback. Nonetheless, investment analysts doubt that this positive sentiment will spill over into Bursa soon.

AmInvestment Bank and Kenanga Investment Bank Bhd, a unit of K&N Kenanga Holdings, are among a handful that are active in the IPOs of foreign companies.

“At Kenanga Investment Bank, we have ongoing mandates for foreign IPOs and are evaluating a few potential foreign IPO candidates,” Kenanga’s Chay says.

According to him, a number of small and medium companies based in China are keen to list on Bursa. “These companies are still fairly large relative to Malaysia’s SMEs.”

In China, it takes two to three years for companies to be listed and even longer for those that are small and medium. Against this backdrop, many Chinese companies have opted to list abroad.

“Access to the capital markets is very important to companies, particularly the high-growth ones,” Chay says.

As for Bursa, foreign IPOs are an alternative to boost its listing activities as the number of new local listings is shrinking, especially in the private sector.

To encourage foreign firms to tap the local equity market, the Ministry of Finance announced in 2009 that foreign companies listed on Bursa are not required to have 30% bumiputera shareholding. The waiver has put Bursa on a par with its regional peers as far as IPOs are concerned.

“We are currently the market leader for foreign IPOs, especially those of companies with China-based operations,” says Anuar. “These companies are deterred from listing in their home country due to size and visibility. To AmInvestment Bank, this was a window of opportunity to tap this pool of companies.”

Nonetheless, some quarters say the outcome is far from satisfactory as only eight foreign companies have listed on Bursa over the past three years.

Anuar says there was an initial slowdown in the IPO market in the past three years, and not just foreign IPOs, amid the global economic uncertainties. However, he adds, the recent high-profile IPOs on Bursa have put Malaysia back in the limelight.

“This augurs well for new IPOs and we remain optimistic about foreign IPOs. Also, we are of the view that Indian companies may be a new source of IPO candidates for the Malaysian equity market.”

Across the Causeway, nearly half of the companies listed on the Singapore Exchange are foreign.

“We have to be selective … I am very particular about the quality of foreign IPOs,” says Bursa’s CEO Datuk Tajuddin Atan (see interview with Tajuddin on Page 38).

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