The weakness of China's stocks: Chinese companies easily misunderstand the rules of the game

Buoyed by the third-quarter results of Sina and two internet companies, Chinese companies listed in the US have rallied over the weekend, with a rebound in investor confidence that the famous shorting firm, muddy water, has been accused of, last month.


　　


but the Chinese corporate concept stocks listed in the US have been the focus of news in recent years, mostly because of accusations from local research institutions, shorting and even collective hunting. According to the case center of the Changjiang Business School, there were 25 cases of such killings of Chinese companies between 2010 and 2011. In July 2012, NYSE-listed new Oriental in the "black 48 Hours" collapsed 70%, this October Muddy Waters accused of "worthless", but also in the past two years to shake the market two examples.


　　


"China stocks" flocked to overseas capital markets a few years ago and were sought after by investors, but after shorting many companies were forced to retire, and only a handful of companies listed in the US this year. Behind the vicissitudes of the earth is the foreign investor's prejudice and hostility, or the company's own illegal behavior?


　　


Chinese enterprises easily misunderstand the rules of the game


　　


in overseas capital markets of Chinese enterprises, under the market regulation and local legal requirements, in financial information disclosure of the slightest dare not snub, if the financial information fraud and was abandoned by the market, it is deserved, boomerang. However, many Chinese enterprises in the market before being questioned and attacked by themselves as a "good child" to comply with the rules of the game, information disclosure is also in line with the provisions of the law. Indeed, in the eyes of domestic capital markets, these companies are law-abiding, but in the U.S. capital markets, if the understanding of information disclosure and investor relations remain at this level, is a very dangerous misunderstanding.


　　


For example, in the new Oriental case, the short body is not directly targeted at the company's financial statement information, but for those who affect the financial performance of non-financial information, that is, statutory must be published outside the financial information. If financial data is a systematic review of the history and status quo of the enterprise, non-financial information is an explanation of the present situation and a prospect for the future. The more important difference is that non-financial information is often voluntary disclosure.


　　


After the U.S. listing, investors in the U.S. capital markets became corporate shareholders, and the company managers had the obligation and responsibility to disclose information about the company to US investors. But some Chinese entrepreneurs are still at home thinking – as long as they are audited by an accounting firm. and audit mainly look at financial statements, non-financial information generally little attention and judgment. Therefore, most Chinese enterprises attach great importance to financial information disclosure, non-financial information is considered irrelevant. Financial information including assets, liabilities, owners ' equity, income, expenses, profits, etc. is important, but they embody the results of business operations, and these results are not financial information, such as corporate strategy, profit model and so on.


　　


For example, an enterprise may disclose the growth of an operating income, but often does not explain its origin-whether it is the influence of patented technology or good government relations? This information is related to the future sustainability of business receipts. As an investor who focuses on the future development of the enterprise, these must be understood clearly. Some of the information should be mentioned in the notes to the earnings, but Chinese companies tend to do so superficially.


　　


how to comply with the rules of the game disclosure?


　　


in the U.S. capital market, how is good non-financial information disclosure? From the content, it should contain two parts.


　　


first is the institutional background, such as the political, economic and regional macro-background of the country where the business is located. Some, for example, are not feasible in the United States, but they can flourish in China. When communicating with investors, it is important to explain the differences between the country in which the business is located and the country in which it is listed.


　　


the second is the company's own situation, including corporate strategy, business model, local tax policy, equity structure and corporate governance issues. When it comes to corporate strategy and business models, Chinese companies should especially focus on the way in which local investors can understand them more easily, and compare them with local counterparts, and discuss in detail the similarities and differences in business models with local peers. The loss of new Oriental food, for example, is due in part to a failure to explain the differences between its business model and that of its American peers, leaving investors sceptical about the company's past performance and worrying about the sustainability of future performance.


　　


When it comes to tax policy, foreign investors should be particularly reminded that China has tax incentives for many industries and regions. If these backgrounds are not clear, investors will have doubts about the sustainability of the company and waver in their confidence. The blame for the new Oriental tax problem stems from its ambiguous and inconsistent tax preferences.


　　


when talking about the ownership structure, we should explain why the Chinese enterprises are mostly shareholding system because of the historical reasons and the entrepreneur mentality, while the American enterprises are mainly equity diversification. It is hard to imagine an executive in a company holding more than 20% per cent of its shares, and the founder of a company like Bill Gates holds about 7% per cent of Microsoft. It is widely believed that large shareholders will encroach on the interests of small shareholders, so when Chinese companies involved in the interests of embezzlement and some investigation, U.S. investors use the "foot" vote, immediately sell.


　　


in talking about corporate governance, we should pay attention to two major aspects: Board efficiency and internal control process. In the structure of board of Directors of Chinese Enterprise, often the company management occupies majority seat, the outside independent director also lacks the profession, this causes the board to supervise the management the ability and the suggestion function are greatly reduced. This structure in the eyes of foreign investors is a small hidden danger. Coupled with a lot of corporate control unscientific, not standardized, the company's internal information acquisition and disclosure costs are high, so that Chinese companies appear to stroll in the cloud, undoubtedly also increased the uncertainty of investment.


　　


we can understand that China has a lot of unique national conditions, and the U.S. legal liability for information disclosure is particularly stringent, so many entrepreneurs feel that some problems may be inconvenient to say in Housetops. But the U.S. market efficiency is very high, the market is full of curiosity about vague information, and can profit from the investment institutions, in this market is difficult to muddle through long.


　　


based on the above content of non-financial information disclosure, mainly in the following forms:


　　


is the annual report. Some of the annual reports of Chinese companies listed in the United States are "compliant", but the quality of the information is not good enough. In the annual report, we cannot simply "gliding" or the transparency of the company will be questioned. Once the loophole in the annual report is caught, it can have a very negative effect. The company should also be prepared for a number of contingency plans for financial PR.


　　


Second, press conference. Many American companies regularly hold press conferences, two or three times a quarter, mainly disclosing three broad categories of information. The first category is earnings forecasts, which allow investors to anticipate future earnings. The second category is the major issues, such as major investment projects or important product development projects to achieve results. For example, a pharmaceutical company with new drugs has been approved by regulatory authorities, these projects, although not yet profitable, but the future will bring significant profits to enterprises. The third category is to introduce the corresponding risks. Chinese companies generally have less exposure to risk, which is not a blow to investors ' confidence, but rather an enhancement, because investors are not afraid of known risks, but of unknown risks.


　　


Third is a regular visit to institutional investors. In this regard, in the past few years, China's listed companies generally do not good enough, but recently strengthened. Because in China, many so-called institutional investors are often used to give listed companies "pallet", and the U.S. institutional investors are mostly to do long-term investment. The formation of the concept of regular visits to institutional investors in order to do a good job of information communication.


　　


and Advice


　　


The drawbacks of Chinese enterprises in Non-financial information disclosure? I think there are three aspects: unclear understanding, lack of capacity, motivation is not enough.


　　


from their own understanding, entrepreneurs must first understand that after listing entrepreneurs are managers, public investors hold more, the public is the big boss. The entrepreneur is to create the return for the shareholder, simultaneously must satisfy the shareholder to understand the enterprise present situation and the judgment future demand. In addition, for a long time to guide the development of Chinese enterprises is mainly the administrative force, and in foreign capital markets, especially in the United States such a very mature market, the power to guide the development of enterprises not from the SEC, but from the market. These include institutional investors, securities analysts, lawyers and a variety of short selling institutions. These forces form an invisible big hand, is important to the stock price of the listed company, if ignores these forces, does not communicate effectively with them, then is doomed to cropper in the market.


　　


in the information disclosure capacity, Chinese enterprises also have a lot of room for improvement. First of all, to have a good insight into the company's own operating conditions, once again, need to have an efficient access to information and analysis of information systems. If the listed companies do not even know which product line is the most profitable, investors must avoid.


　　


In the disclosure of power, in addition to cultural and psychological reasons, many companies fear that information disclosure may disclose trade secrets, but conducive to competitors. There is indeed a lot of research that is proving the problem, which is academically called the "franchise Cost" (Proprietarycost). This cost does exist, but unless it is a very specific industry, such as a pharmaceutical company, if the disclosure strategy is right, the information is generally not enough to allow competitors to prevail. The usual practice for American companies is to explain why this is disclosed and to maintain the same level of disclosure as rivals. The cost of not disclosing is that your investors cannot understand you and will naturally lose interest in you.