Chinese Companies Are Going Where the Money Is

Instead of doing IPOs at home, they're listing on foreign bourses

Most mainland Chinese companies are delighted to be awarded one of the carefully rationed slots on the Shanghai or Shenzhen stock exchanges. Stocks newly listed on these bourses--more like casinos than serious markets--invariably shoot up in price, quickly enriching the founders of the companies involved. But when Wang Chuan-fu decided to take his company public, he never considered raising money at home. BYD Co. was already the world's No. 4 rechargeable-battery maker, and Wang had dreams of becoming No. 1. So he opted for the prestige of an overseas listing. "Sure, if you list on the mainland, you make more money," says Wang. "But we wanted a long-term relationship with international capital markets."

He got what he wanted. The company appeared on the Hong Kong exchange at the end of July and, despite the summer's global swoon, raised $210 million in an offering that was seven times oversubscribed, attracting big-name money managers such as Fidelity Investments. BYD's stock is currently trading about 30% above its initial public offering price.

BYD is just the latest in a growing number of privately owned Chinese companies looking to international investors for capital. Thirty-eight companies--from orchid growers to natural gas distributors--have tried their luck in foreign markets in the last two years, and there are plenty more in the pipeline. Some have tapped the New York and Singapore markets, but the majority have listed in Hong Kong, still considered foreign territory for investment purposes.

The migration is giving China's cash-strapped private sector a much-needed boost. Until recently, entrepreneurs in China had to rely on investment from friends and family to finance new ventures. Even now, bank loans and local IPOs remain largely the preserve of state-owned companies. But the private sector now accounts for at least 40% of China's economy and has attracted interest from developed-nation investment bankers. "There are some terrific businesses," says Michael J. Berchtold, president of the Asia-Pacific division of Morgan Stanley and Co. "There's tremendous growth of profitability in the private sector."

Take Chaoda Modern Agriculture, an organic-produce grower and distributor, whose fruit and vegetables have even found a place on the supermarket shelves of the fussy Japanese. Deutsche Bank analyst Jim Lam predicts that the company's net profit for the year ending in June, 2003, will jump 28%, to $69 million. He says that the company has yet to make the most of its strong links with universities conducting agricultural research and that it is poised for strong growth. The company listed in Hong Kong in December, 2000, raising $78 million. Its stock is up 54% from its IPO price.

Until now, most companies going public have listed on Hong Kong's secondary board, the Growth Enterprise Market, and have been underwritten by local investment banks in deals that raised just a few million dollars. Now, the global giants are getting into the act. Goldman, Sachs & Co. is expected to take Beijing-based property developer SoHo China public within the next few months, while HSBC is working on a deal for Beijing Hi Tech Wealth, which makes personal digital assistants.

Like almost all other Chinese companies, however, the ones that are currently going public present serious transparency issues and can be minefields for investors. But calls for more disclosure are forcing Chinese managers to improve their game. "More and more companies, whether private or state-owned, are attaching greater importance to corporate governance," says Francis P.T. Leung, chairman of the Asia office of Salomon Smith Barney. "Going public [abroad] will help them move forward on this." Who knows? If China's private players learn the rules, their stock may become the country's next hot export.

By Frederik Balfour in Hong Kong

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