Billionaires' Fortunes Are Being Wiped Out in China's IPO Frenzy

  • Booming IPOs create 23 billionaires, but fortunes often fade
  • Share-price volatility fuels risk for equity-backed loans
Photographer: VCG via Getty Images

It took just three weeks for Ding Lieming to quintuple his net worth and become a freshly-minted billionaire. Six months later, almost half his fortune was gone.

A tale of bold bets gone bad? Nope, just business as usual in the Chinese stock market.

The wild ride for Ding, chairman of Hangzhou-based Betta Pharmaceuticals Co., illustrates the latest upheaval surrounding wealth creation in China: tycoons who rapidly gain -- and then almost as quickly lose -- billionaire status amid swings in the country’s initial public offerings.

The IPO booms and busts, fueled by a mix of government intervention and unbridled speculation, are becoming more frequent in China as authorities accelerate approvals for newly listed shares. While the offerings have made billionaires out of at least 23 tycoons in the past 12 months, their collective net worth has dropped from a peak of $55 billion to $35 billion as of June 20, according to the Bloomberg Billionaires Index.

The numbers are a stark reminder of the flaws in China’s IPO system, and of the risks facing newly rich entrepreneurs, especially those who pledge their shares as collateral.

Ding’s experience with Shenzhen-listed Betta Pharmaceuticals is a case in point. Like many Chinese companies, the maker of lung cancer drugs priced its IPO at 23 times reported profits, the highest valuation allowed by Chinese regulators. The cap, which doesn’t apply once trading begins in the secondary market, is less than half the median price-to-earnings ratio of already listed shares in Shenzhen.

Speculative Frenzy

The limit was designed to protect retail investors, but has instead fueled speculative frenzies that can leave latecomers vulnerable to losses, according to Jay Ritter, a finance professor at the University of Florida known as “Mr. IPO” for his research on share sales. China’s securities regulator didn’t immediately respond to a faxed request for comment.

After reaching a high on Nov. 25, Betta Pharmaceuticals shares dropped for five of the next six months, knocking more than $500 million from Ding’s fortune. The company reported financial results for the first quarter on April 25: Sales dropped 17 percent from a year ago, while net income slid 27 percent.

"Ultimately, fundamentals do apply,” said Brendan Ahern, chief investment officer of Krane Fund Advisors LLC in New York.

As is typical of Chinese businessmen who have most of their wealth tied up in their companies, Ding has pledged shares as collateral. He put up about 8 percent of his position in Betta Pharmaceuticals to creditors as of March 31, according to company filings. Ding, who’s fortune has fallen below $800 million, declined to comment on questions about his net worth sent through his assistant.

Equity-backed loans can be dangerous in a market like China’s. Wang Jing, a telecom magnate who plans to build an interoceanic canal in Nicaragua, is one example of the risks.

Throughout 2015, Wang pledged almost all of his holdings in Beijing Xinwei Telecom Technology Group Co. to creditors. After the shares collapsed, Wang said in a December statement that he would ensure timely replenishment of collateral for any price swings. Trading in the stock has been suspended for the past six months, with the company citing the need “to avoid abnormal fluctuations." Beijing Xinwei didn’t respond to phone calls and an emailed request for comment.

Some of China’s IPO tycoons have managed to stay above the billion-dollar mark even as their companies’ share prices retreated from post-listing highs, including Qin Qingping, chairman of Dezhou-based chemical producer Jinneng Science & Technology Co., and Zhou Liangzhang, chairman of Hangzhou-based Hexing Electrical Co. The billionaires, neither of whom has ever appeared on a major international wealth ranking, have fortunes of $1.1 billion and $1.6 billion, respectively. Neither of them responded to requests for comment sent to their companies.

If China’s IPO waiting list of about 500 companies is any guide, the country could have plenty of new billionaires in the pipeline. Get ready for more wild rides.

— With assistance by Pei Yi Mak, Hui Li, Tian Chen, and Amanda Wang

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