Chinese companies tap local goodwill
A listing on the bourse gives them an air of respectability back home, write Peter Cai and Ben Butler.
When TTG Mobile Coupon Services, a small e-commerce company, made its debute on the Australian Securities Exchange last year, it raised just $2.4 million from investors.
The amount was only enough to cover the costs associated with the listing. But the float gave the company a market valuation of $642 million, an extraordinary amount considering the company's revenue was less than $10,000 a month.
It raised eyebrows in China as business journalists and venture capitalists wondered about the motives behind this mysterious listing in Sydney.
But TTG is not alone in making the long march from China to the ASX. Despite a crackdown by the Australian Securities and Investments Commission, there has been a flood of Chinese businesses attempting to list on Australian stock exchanges in the past year, drawn here by the credibility the regulatory system enjoys back home in China.
This week, clothing company Sunbridge Group became the latest Chinese business going to market in Australia, putting out a prospectus to raise $10 million and float on the ASX, in a deal that values the company at $100 million.
ASIC has identified 760 ASX-listed companies that are based in what it calls "emerging markets" - 571 of which are from Asia or the Pacific.
In a report issued this week, it warned that investing in emerging market companies carried extra risks associated with the offshore nature of the investment, including corporate governance issues, internal risk control problems and related party transactions.
ASIC raised the spectre of Sino-Forest, a Canadian-listed forestry business that ballooned to a market capitalisation of C$6 billion before being exposed as a fraud and collapsing last year.
Novus Capital senior corporate advisor Nick Kapes, who is working on the Sunbridge issue, says some Chinese floats run afoul of ASIC because their American-educated Chinese advisers try to apply Nasdaq rules rather than Australian ones.
"Related party transactions in Australia especially are looked at with a fine-tooth comb," he says. "They [the advisers] honestly believe in their heart of hearts that, you know what, these transactions were done in a private company, we don't have to justify it to anyone.
"And that's not the case."
ASIC also looks closely at auditors and valuations, Kapes says.
"ASIC is very clear - auditors have to be within Australia."
He says that unlike Sino-Forest, the owners of Chinese companies whose ASX floats he has worked on are not "taking the money and running".
Chinese businesses looking to float in Australia are typically trying to sell between 5 per cent and 25 per cent of the company, with the rest retained by the original owner.
Kapes says Sunbridge founder Jia Yin Xu "started the company from nothing". "He really really has high aspirations for this company and he really looks forward to paying dividends."
TTG Mobile's case is even more extreme - it sold just under 1 per cent of the company to outside investors when it listed in November.
The company trades on a hefty forward multiple of 1690 times.
The man who brokered the listing deal, Chris Ryan, managing director of advisory firm Investorlink, says the listing of TTG on the ASX was not about the money.
TTG Mobile wants the respectability label of an ASX listing to strengthen its bargaining position with China UnionPay, a financial behemoth that controls the country's 15.9 trillion yuan domestic payment system.
"The listing is important because TTG needs to provide credibility, if you like, to its main partner, China UnionPay, China's largest issuer of cards," Ryan says.
"For them to rely on a private company to provide a software platform is a stretch.
"They would prefer to deal with a public company. Our Chinese colleagues respect the ASX and Australian regulatory market," he says.
TTG Mobile Coupon founder and chief executive Xiong Yang says he considered the ASX's reputation as a well regulated market to be the main consideration.
"We raised enough capital before our listing. We didn't come here to ask for more money," he says. "We want to improve our corporate governance and provide a fair and transparent structure to our existing shareholders."
Investorlink executive director Ross Benson says he knew at least 20 Chinese companies that wanted to list in Australia.
"I think you will see over the coming years, an increasing trend of both developing and developed Chinese business doing what TTG is doing," he says.
While ASIC has knocked back several China-based floats over the past one year, the regulator's reputation for taking a hard line also provides credibility for those who make the grade.
Coming back for a second stab at an Australian listing is clothing group China Puda High-Tech Holdings, which had its prospectus stopped by ASIC in late April. It was looking to raise $10 million on the NSX, the secondary exchange.
Company secretary Ting Jian says ASIC wanted to see accounts that had been updated and audited, rather than the unaudited figures in the earlier prospectus.
"We are determined to list, even though we got an objection from ASIC last time," he says.
He says the company might later switch to the ASX and needs "access to a good capital market with good regulation".
"When Chinese capital markets first opened in the 1980s, they first learnt from ASIC.
"So ASIC and the ASX have a very good reputation in China."
The Chinese float market is has been inactive for nearly a year as Beijing tries to clean up corruption within the securities industry, creating a backlog of 700-plus companies.
The long waiting list forces Chinese companies to look elsewhere for listing opportunities.
Andrew Plympton, who has signed on as a non-executive director at Sunbridge, says Chinese companies want "to get on to an exchange that has a certain amount of credibility, particularly in the Chinese market".
"If you are a strong and emerging business and you are noted to be a public listed company on an exchange that has a global reputation, that has a lot of points.
"Your bankers are more comfortable with you ... the local governments have a higher level of respect for you because you are a listed entity."
Chinese companies previously favoured listing in the US, but that market took a hit after some of them, including Sino-Forest, were exposed as frauds.
Eric Gao, an investment manager at Asia Pacific Capital, says the ASX is an attractive destination for private Chinese companies that want to list at an overseas exchange.
"Some Chinese companies don't want to be associated with the scandals in the United States and onerous listing requirements in Hong Kong favour large state-owned enterprises over smaller businesses," he says.
"The ASX provides a healthy platform for smaller private Chinese companies that can't meet the high financial threshold elsewhere."
Industry sources say that at about $500,000, it is cheaper to list in Australia than on the Shanghai exchange, where a listing can cost about $5 million.
Younger generations of Chinese entrepreneurs who want to take their companies public are moving away from traditional areas such as resources and manufacturing, and into new areas such as e-commerce and renewable energy.
Gao warns that a few Chinese companies have questionable listing motives. "Some of them are only interested in taking money from investors and others don't have long-term local business strategy."
From the PRC
to the ASX
RECENT AND UPCOMING FLOATS
TTG Mobile Coupon Services Based in Shenzhen, the payment systems
group issued 4 million shares at 60 cents each in its November float, raising
$2.4 million. Its shares have more than doubled in value, despite TTG reporting a
loss of 18 million yuan to the 12 months to March.
Sino Australia Oil and Gas
The Daqing-based contractor operates drilling technology for Chinese oil and gas
firms. It was aiming for a June listing, but its float was this week pushed back until
October. The company is hoping to raise $12 million by selling 24 million shares at
Jinjiang City-based retailer that sells to ‘wellgroomed upper middle class gentlemen’.
It is seeking to raise up to $10 million by issuing 50 million shares at 20c each.
The Shanghai-based m-commerce outfit dubs itself ‘China's largest mobile
banking shopping mall’, with a platform that allows Chinese shoppers to buy goods and services from their mobile devices. It hopes to sell 50 million shares at 40c each in its float, and aims to hit the ASX in late September.