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Asia300

The price of Chinese companies returning to mainland listings

Party involvement in corporate management could cause conflicts of interest

Robin Li Yanhong, founder, chairman and CEO of Baidu, answers questions from the media in the Great Hall of the People in Beijing. (Photo by Shunsuke Tabeta)   © Not selection

SHANGHAI -- Robin Li Yanhong, the founder, chairman and CEO of China's leading search engine operator Baidu was in the Great Hall of the People in Beijing on March 3, in his capacity as a member of the Chinese People's Political Consultative Conference, a national political advisory body in China.

Contrary to his usual relaxed style of dress, Li wore a necktie and told a surrounding crowd of reporters, "It has been my long-held dream to be listed on the mainland." He was surrounded by reporters again in the same venue on March 14.

Baidu, known as China's Google for its dominant position in the country's internet space, listed on Nasdaq in the U.S. in 2005. On the first day of trading on Aug. 5 that year, the company created a stir with its opening price of $66, a jump of 2.44 times from the IPO price of $27.

More than 12 years later, on March 15 2018, its shares were traded at $262.71, giving Baidu a market capitalization of $91.46 billion. 

Despite Baidu's US listing success, when the Communist Party called for major Chinese companies to return to the mainland bourse, the Nasdaq bluechip immediately responded.

Or possibly Baidu had no other choice.

In 2016, the company was hit hard by a scandal involving deceptive medical advertising. There is a chance that had Baidu ignored the party's call, coming to be seen effectively as its enemy, the scandal could have resurfaced. Because of his key government post, it may be that Li had no other choice.

Coming home

In addition to Baidu, other leading Chinese information technology companies have shown a willingness to return to the mainland. Among them are e-commerce company JD.com and portal site operator NetEase. Internet security company Qihoo 360 Technology has already wound up its overseas listing, offering shares for trading on the Shanghai bourse in February.

Listing on the Chinese mainland offers certain benefits. As individuals account for 80% of stock trading in China, well-known stocks tend to attract buyers.

Hon Hai Precision Industry, the Taiwanese electronics contract manufacturer known also as Foxconn Technology Group, will list its core Chinese subsidiary Foxconn Industrial Internet, or FII, on the Shanghai market. Analysts estimate that the size of the IPO could reach 475.8 billion yuan ($75.2 billion) based on forward price-to-earnings multiples of 30 times for tech stocks in China. That would be more valuable than Foxconn's market value of some 1.6 trillion New Taiwan dollars ($55.2 billion) in Taipei, where stocks trade at an average of around 10 times forward price-to-earnings ratio.

Index complier MSCI of the U.S. will include mainland-listed Chinese shares in its benchmark emerging market stock index from this year, arousing expectations that they will attract investment from index-based investors across the world.

Chinese companies, if they accept a status as the party's "vanguards," can expect favors from the government in licensing and other procedures.

But such benefits may come at a price.

In November 2017, China United Network Communications, or China Unicom, the country's third largest telecom company, raised 78 billion yuan through a third-party allocation of new shares of its Shanghai-listed unit to Baidu, JD.com and its rival Alibaba Group Holding, as well as other well-known companies including mobile chat app provider Tencent Holdings.

But these big-name backers had evidently been urged by authorities to help rebuild the management of the major state-run telecom companies. Given China Unicom's complicated relationship of vested interests, the company is evidently not in a position to carry out management reforms and therefore its stock price has been trading lower than the level it was at before the capital increase.

Meanwhile, Alibaba and Tencent are showing their commitment to the mainland with plans to open outlets in the Xiongan New Area, a city under construction in Hebei Province that is a pet project of Chinese President Xi Jinping.

It is a potentially worrying development for shareholders that managers at Chinese companies are starting to curry favor with the party while growing less sensitive about the norms of the capital market. As these companies accept a deeper involvement by the party in their management, this could lead to possible conflicts of interest with investors.

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