PAX Sinica? Stick to Hong Kong

The PAX Global affair highlights the city's greater commitment to transparency and open debate.

Anyone doubting the enduring value of Hong Kong as a venue for international investors interested in China need only glance at Wednesday's news out of PAX Global Technology.

Chris Lee, PAX's chief financial officer, resigned a week after ejecting from an earnings briefing an analyst who had rated the company a sell. Video of the executive berating Macquarie's Timothy Lam had circulated on social media and sparked a furor in the city.

Critics have questioned whether Hong Kong can maintain its pre-eminence as a fundraising center for China as the mainland develops and further opens its markets to the outside world, exemplified most recently by Tuesday's decision to establish a second stock-trading link with the former British colony. Why go through Hong Kong, the argument runs, once  investors can freely buy shares in Shanghai or Shenzhen?

The PAX Global episode provides one simple answer: better corporate governance standards. That an executive's mistreatment of an equity analyst can trigger a backlash and lead to the executive's departure is evidence that a culture of transparency and openness still counts for something in Hong Kong. In stepping down, Lee described his own behavior as "unacceptable."

The conflicts for sell-side analysts have been well documented. Buy ratings far outweigh sells around the world. On the rare occasion that investment-bank analysts hang a sell sign on a stock they cover, the correct approach is for management to engage and seek to persuade with facts and disclosure, not throw a fit of pique and bar the doors.

Executives who react with defensiveness and even abuse to adverse opinions can only feed suspicions of problems beneath the surface. In 2001, former Enron CEO Jeffrey Skilling famously called one analyst an "asshole" on a conference call. The company collapsed later that year.

Negotiating conflicts may be even more difficult for analysts in single-party China, where there is no culture of freedom of speech to rival that of Hong Kong, a Chinese city with a Western heritage in its legal system and business structures. The scope for dissenting opinions has been narrowing further as the government of President Xi Jinping brings the media into line. Selling stocks was even unpatriotic for a time, as authorities sought to prop up a collapsing market last year. It would take a gutsy analyst to put out a sell recommendation in that environment.

Indeed, Bloomberg data show that Chinese companies are even more rosily represented by analysts than elsewhere. More than 70 percent of ratings for companies on the blue-chip CSI 300 Index are buys, compared with 56 percent for Hong Kong's Hang Seng Index and 48 percent for the S&P 500 Index. Perhaps this simply reflects better earnings prospects in China's recovering economy? Hardly: The gap between profit forecasts and reality is widening.

Hard Sell

China's benchmark index has the highest percentage of buy recommendations on constituent companies

Source: Bloomberg

The discipline of the market is the best remedy for companies that try to suppress opinions they don't like. Macquarie's Lam was the first analyst to put a sell rating on PAX Global, a payment-systems company whose stock has dropped more than 20 percent this year. The stock fell as much as 5 percent on Aug. 11, after Nomura cut its rating on the company in a report titled  "CFO conduct disrupts shareholder value." 

The shares rose as much as 2.4 percent Wednesday after CFO Lee quit, though they reversed that gain in afternoon trading. Sixteen out of 19 analysts tracked by Bloomberg still rate the company a buy.

Struggling Stock

PAX Global shares have underperformed the broader Hang Seng Index recently

Source: Bloomberg

The sequence of events is hard to imagine in mainland China, a retail-dominated market where institutional investors and brokerage analysts hold less sway. The finances of much of China remain the "mystery meat" of emerging markets, in Bill Gross's memorable phrase. For those who like to know what they're eating, Hong Kong remains the safer option.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the authors of this story:
    Nisha Gopalan in Hong Kong at
    Matthew Brooker in Hong Kong at

    To contact the editor responsible for this story:
    Paul Sillitoe at

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