Overseas IPO difficulties

Tainted by compatriots' scandals, Chinese firms struggle to list in Europe

With Frankfurt likely out of bounds for Chinese company flotations after a series of corporate problems, their advisers would be forgiven for seeking alternative capital-raising venues around Europe. They will probably find it tough going.

The announcement by Frankfurt-listed Chinese shoemaker Ultrasonic in mid-September that its CEO had vanished along with about $60 million, may have heightened the sense of risk in buying shares in Chinese companies, even if they carry the seal of approval of being listed on a prestigious European bourse.

Such concerns will not be confined to Germany and are already present in Warsaw for instance, whose bourse has hosted two Chinese listings in the past year only to see both subsequently lose value.

Marek Buczak, head of foreign markets at Warsaw-based mutual fund Quercus TFI, said the experience of Ultrasonic and some other Chinese stocks listed in Frankfurt could be a warning to Polish investors. "Chinese firms may find it difficult to gain capital in Warsaw," he told Reuters.

Ultrasonic CEO Wu Qingyong re-surfaced on September 21 saying he had simply been on holiday and had lost his mobile phone.

Chinese media rumors about a news conference planned for September 30 by the local government in Jinjiang, East China's Fujian Province where the shoemaker's main factory is located, were also rejected.

"There was no such thing as a planned news conference," said an official with the local publicity department when contacted by the Global Times on Tuesday.

But this may not be enough to restore confidence in Chinese listings as a whole, even as US investors lap up shares in tech leader Alibaba Group Holding.

Shares in both Chinese companies listed in Poland, Peixin International Group NV and JJ Auto, are trading well below their debut levels.

Peixin shares have lost around a third of their launch price last October, while Warsaw's WIG index has climbed 11 percent over the same period. JJ Auto has lost about a quarter of its value, making it the worst debutant on the Warsaw bourse this year.

First choice

Yet the motive for Chinese companies seeking a listing remains the same: It is so much harder to float on a domestic bourse, often taking years instead of a matter of months.

Mid-sized Chinese firms have as a result looked to Europe, mostly to Frankfurt and London. Data from the London Stock Exchange (LSE) shows seven Chinese companies on its main market and another 54 on its AIM market for smaller firms.

The LSE has previously expressed interest in attracting more listings from Asia as a whole and has recently signed agreements with Chinese banks that could lead to more flotations. Yet there has been no new Chinese company listing on its main market since 2010 and the AIM shares are mostly fairly small and also attract little turnover.

In Frankfurt, which embarked on a push for more Chinese listings eight years ago with dreams of landing a major catch like Alibaba, there are eight Chinese stocks on the bourse's main market. But sensing interest was cooling in Frankfurt even last year, some Chinese firms shifted their sights to the Warsaw exchange, the largest in Central and Eastern Europe.

"We also considered Frankfurt, but Chinese companies listed there with rather mixed results," Peixin Chief Executive Xie Quilin told Reuters. "Their perception wasn't optimal, so we decided that Poland is a better market for us."

Warsaw exchange chief Pawel Tamborski acknowledged events in Frankfurt were a concern but said the bourse would continue to try to attract Chinese listings.

"We were quite active and would like to continue to push Poland to China," Tamborski told Reuters. "The two companies listed in Warsaw are early birds. What is required is the education of Polish investors about China, about the Chinese economy, about Chinese corporate governance. It is great that we have them [the two companies] but [winning Chinese listings] is still at an early stage."

Elsewhere the picture is patchy at best.

Bourses in Switzerland, Madrid, Budapest, Zagreb, Belgrade, Prague, the Gulf and Bucharest, said they had no Chinese equity listings on their markets. Pan-European exchange Euronext said it had no Chinese bond or equity listings on its main markets.

The Swiss bourse operator, SIX Group, said it had one Chinese bond listing, while Nasdaq Dubai has at least one bond listing from a Chinese firm.

Warsaw does at least have a track record of embracing companies from outside the EU. Most notably, nine firms from Ukraine are trading there.

According to Andrzej Szurek, a former Warsaw bourse employee who worked on the Ukrainian listings, regulations were no less strict than on the big, established European bourses, but the costs in Warsaw were much lower.

Low liquidity

Szurek said some Ukrainian firms had tried listing in Frankfurt but had found liquidity in their stocks was lower, while in Warsaw there were investors, including local pension funds, keen to trade in the Ukrainian shares.

But any success for Ukrainian stocks has not been duplicated for Chinese firms.

Peixin, producer of machines used in the hygienic materials industry, floated in October 2013 despite selling only a fourth of the shares on offer. In June it wanted to run another issue in Warsaw but withdrew, citing unfavorable market conditions.

Meanwhile, car parts maker JJ Auto tried to sell shares in both Warsaw and Frankfurt but sold only 5 percent of the offer.

It said 170 Polish individual investors took up the shares.

There is no suggestion that Peixin or JJ Auto are not meeting required standards of corporate governance, but they may have suffered from association with some of their compatriots.

Jaroslaw Dabrowski, head of Warsaw-based investment boutique DF Capital who helped to manage both Chinese offers, said he was in talks with other firms willing to list in Warsaw, but the attitude of Polish investors may be a key obstacle.

"There is a problem with the financial institutions which do not have the know-how necessary to invest abroad. Warsaw must be more innovative and ready to accept bigger risks, because it is still in the growth stage," Dabrowski said.

"We will keep trying ... We still support Warsaw, but we're expanding our scope of interest to Frankfurt and Bucharest."