Many of the Chinese companies listed on the German Stock Exchange in Frankfurt continue to trade below their issue price. A lack of trust in these companies and those listed on other western exchanges has persisted since the Sino-Forest affair. This is notwithstanding strong growth and high profits. Yet recent news indicates that this could change soon.
A quick recap for those who have been able to forget Sino-Forest: great uproar surrounded the Toronto-listed Chinese company in June 2011 when Muddy Waters implied that its IPO was orchestrated as a fraud right from the very beginning. Among other things, Muddy Waters alleged that the value of the forests acquired in Yunnan province was overestimated by 900 million dollars.
Sino-Forest lost 80 per-cent of its share price - a fall from market value highs of some 6.2 billion Canadian dollars. Similar accusations have been made against Longtop Financial, China Agritech and Chaoda. Consequently, Chinese companies listed in Germany declined strongly in value while subsequent IPOs only achieved very low issue volumes.
After a difficult two years, Chinese companies listed overseas have been rebuilding their image in the West. This has required a mix of regular and improving communications with the market, as well as the appointment of credible executives joining the boards of these companies, such as former Linde board member Hubertus Krossa now at United Power and previous Motorola board member Norbert Quinkert now at Vtion.
During the past few months, there have been signals of a possible renaissance of Chinese companies in Germany. For one thing, there has been a lot of positive news in the media about Chinese companies. The thawing of what was once almost relentlessly negative reporting of German-listed Chinese companies can be traced back to the German Equity Forum – Germany’s most important investor conference - in mid-November 2012, when there were several professional presentations by board members of Chinese companies. As a result the financial magazine “Börse Online” included Kinghero AG’s and Ming Le Sports AG’s Chinese shares in its respected equity portfolio (full disclosure: I am chairman of the supervisory board of Ming Le).
Of course, it helped that soon after this, the National Statistics Office in Beijing reported fourth quarter growth of 7.9% - the first quarter that Chinese GDP showed a quarter-on-quarter increase after two years of declining growth. So now the Chinese shares in Germany with low price-earnings ratios between 2 and 5 offer cheap 'buy' opportunities. Tellingly, one rumour doing the rounds of the German Equity Forum was that a large family office owned by a German billionaire is establishing a position in Chinese shares – a promising 'red packet' ahead of the year of the snake.
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