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Aligned interest

The reality of corporate governance and the folly of those who downplay its importance are beginning to be taken seriously by Asian companies that are intending to seek public money, according to the Asia Private Equity Review.

The flotation of China Life was Asia's largest initial public offering of 2003, raising $3bn in what was undoubtedly the offering of the year. And yet the China insurance giant has been a subject of regulatory probes ever since becoming a public company in December last year.

China Life's public debut animated a lethargic stock market and led to a boom that is just beginning to taper off. Its IPO also affirmed investors' escalating interest in China stocks. But investors did not commit with blind faith. Shortly after China Life's listing, the insurer's parent company's accounting procedures, as well as its share allotment practices, have been under scrutiny. Although China Life's shares continue to trade above its offered price, the stock has dropped by 40 per cent from its height of HK$7.05 (US$0.9). The erosion of investors' confidence in 2003's largest IPO testifies to their insistence on the alignment of interest from companies.

Even the debut of Japan's Shinsei Bank, the most spectacular listing in Asia so far in 2004, did not escape investors' discipline. Backed by a consortium of investors led by Ripplewood Holdings, Shinsei was a resounding success story for Asian private equity. Yet its public debut was tarnished by word of an impending lawsuit. Two days before the bank was due to be listed on the Tokyo Stock Exchange, it hastily issued an amended prospectus informing investors of a law suit brought by EIE International, the bankrupt previous owner of luxury hotels. In the suit EIE International alleged that Shinsei's predecessor, Long Term Credit Bank, illegally sold off EIE assets to recover the bank's $2bn in loans. EIE sought $7bn in damages.

Investors were hungry for Shinsei's stocks, and the last-minute disclosure by the first Japanese bank controlled by foreign interests did not have an immediate impact on its first day trading. On 19th February, the day of its debut, Shinsei's share price soared from the offered price of ¥525 (US$4.89) per share to ¥827 (US$7.71). However, in the week following Shinsei's listing, the glare from the EIE lawsuit began to cast a long shadow on the stock, which plunged by 8 per cent to ¥760 on 24th February.

Shinsei's management quickly shifted into damage control mode and subsequently announced an out-of-court settlement with EIE International.

In the following month, NASDAQ-listed Linktone Ltd. found itself in a similar predicament. Prior to its public debut, investors in the China-based wireless service provider were informed of issues related to the company's revenues. Linktone, which is invested by Acer Technology Ventures and Temasek Holdings, provides SMS services to local mobile networks. It acknowledged that it was experiencing problems in collecting revenues from China Mobile. Investors appeared to be nonplussed by Linktone's revelation. On the first day of trading its American depository shares, the company's share price rose by 24.4 per cent and closed at $17.42 against its offered price of $14. Linktone was able to raise $85.7 million.

Unlike Shinsei, however, which is still trading 40 per cent above its offered price, Linktone's share price has since dropped by more than 38 per cent in the eight weeks after it first began trading.

By the time Semiconductor Manufacturing International Corp. ('SMIC') went public on 18th March on both the Hong Kong Stock Exchange ('HKSE') and the NASDAQ, investors were less accepting of news concerning irregularities and pending legal tussles.

In the weeks leading up to SMIC's much-publicised dual listing, China's largest chip manufacturer faced a legal challenge from its Taiwan-based rival, Taiwan Semiconductor Manufacturing Corp. However, according to market analysts, the pending legal dispute was not the main driver of the fall of SMIC's share price on its debut. Instead, it was the inconsistent capital expenditure forecast disclosed by SMIC's chief financial officer as well as its aggressive pricing that saw SMIC's share price plunge 8 per cent on its first day of trading on the HKSE.

SMIC had the unfortunate distinction of being the first China technology stock to suffer a drop in share price on its first day of trading after the market enjoyed an uninterrupted bull run that began in December.

The result of the current IPO roadshow of Shanda Interactive Entertainment ('Shanda') will shed light on investors' response towards companies seeking public listing status as they contend with legal disputes. Shanda, which is backed by the Softbank Asian Infrastructure Fund, is the holding company of China's largest online game operator. Since mid 2003, it has been facing a number of legal challenges. Currently, Wemade, a South Korean online game producer, is claiming that Shanda infringed on its intellectual property rights.

Despite being embroiled in litigation, Shanda is moving ahead with its plan to list on the NASDAQ. It has, however, recently initiated an extensive management overhaul. Its founding member was reassigned, while a new team of professional managers were put in place. The response to Shanda's IPO and its subsequent listing performance will be a barometer of investors' sentiment toward companies plagued by governance issues.

Observation
In the coming months, a stream of mostly Chinese companies, previously backed by private equity capital, will seek public listing status. Warburg Pincus' Harbour Network is preparing for its public listing, while CSMC Technologies, which enlisted Walden International, 3i plc and International Finance Corp. as its financial backers, is also joining the listing queue.

Meanwhile, the listing plans of companies like Mengnui Dairy and China Minsheng Bank ('Minsheng') appear to have been put on hold.

Mengniu Dairy Co. Ltd. ('Mengniu'), backed by Morgan Stanley and CGU-CDC China Capital Partners Ltd., had indicated that it was aiming for a public listing status on the HKSE in the first half of the year. That has been put in doubt by rumours, believed to have been engineered by its competitors, that Mengnui was selling contaminated milk. The largest dairy producer of Inner Mongolia has since taken a subdued position on its listing plan.

Minsheng Bank has also eased off its public listing drive as well. China's first national private bank initially received funds from International Finance Corp. and most recently from Newbridge Capital. When reports surrounding improper procedures surfaced relating to its listing on the Shanghai Stock Exchange, Minsheng retreated from the public glare and has been rather mute on its public listing plan.

China Netcom, which is also planning a public listing, is leaving nothing to chance. The second largest telecommunications carrier in China and the first to receive foreign capital, China Netcom has instituted measures to ensure that its assets are solid and it credibility is intact in the run up to its IPO. It has also learned from the humiliating public listing experience of China Telecom.

In November 2002, China Telecom, the country's largest fixed-line carrier, went public in both Hong Kong and USA. On its first day of trading in Hong Kong, its share price fell by 2 per cent, while in the USA, it dropped by 6 per cent. This occurred despite the fact that China Telecom was offering "sweeteners", such as dividend payments to investors.

In its latest structural overhaul, China Netcom divided its assets along geographical lines in China. In February this year, it bought back Asia Netcom, which was 40 per cent held by private equity houses Newbridge Capital and Softbank Asian Infrastructure Fund. In this way, China Netcom hopes to ensure that all its major assets come under one umbrella.

China Netcom's pragmatic approach bespeaks its understanding of the prevailing market winds. It has postponed its listing date to the second quarter of this year and revised its fund raising target from $2bn to $2.5bn, to $1.5bn to $2bn.

The reality of corporate governance and the folly of those who downplay its importance are beginning to be taken seriously by Asian companies that are intending to seek public money.

Asia Private Equity Review (APER) is the foremost voice on matters related to private equity/venture capital in the region. Well-recognised as being the singular source for accurate and timely news, in-depth analysis and global perspectives, APER is published by the Hong Kong-based Centre for Asia Private Equity Research. For further information please visit our website at www.asiape.com or email us at info@asiape.com