 United Technology Holdings CEO Zhang Hongjie, right, talks to Korean reporters and analysts at the company's office in Jinjiang in southeastern China, Thursday. He said that it is one of his priorities to restore investors' trust by hiring a Korean auditor. / Korea Times photo by Kim Da-ye |
By Kim Da-yeLast Wednesday China Ocean Resources, a Chinese deep-sea fishing company listed at the Seoul bourse, saw its stock price plummeting as some investors raised doubts over the firm’s fleet of fishing vessels.
They claimed that two vessels named “Fu Yuan Yu 866” and “Fu Yuan Yu 870” was one and the same, believing that the Chinese firm tried to inflate the size of its fleet.
China Ocean had put the photos of its fleet of 26 vessels to restore investors’ trust after a change in ownership and the attempt for paid-in capital increase damaged its reputation.
Fortunately, the firm was scheduled to hold a presentation for a group of Korean journalists and analysts on the same day.
The company officials showed the licenses of the vessels that clearly showed two different engine numbers. Verifying the information, journalists wrote stories that could assuage investors’ concerns.
This is a good example of how Chinese firms can relieve the “China discount” ― the phenomenon of Chinese firms’ stocks listed in Korea being undervalued due to investors’ distrust in China regardless of a company’s actual performance.
The China discount has intensified since polyester yarn maker China Gaoxian Fibre Fabric Holdings experienced a trading halt of its shares on March 22 since its auditor Ernst & Young could not verify the bank balances of one of its affiliates.
The trading halt at the Seoul bourse came a day after the same action at the Singapore Exchange (SGX), causing losses to retail investors.
Trading shares of the company, which initially went public on the SGX, still remains suspended both in Singapore and Korea while investors fear it could be delisted at any time. The firm also hasn’t provided any clear explanation to what went wrong in its accounting practices.
The mounting problems at China Gaoxian brought down the stock prices of other Chinese companies that belong to different industries despite not having caused trouble in the past.
Sports shoe maker China Great Star International plunged from 2,060 won on March 21 to 1,405 won Friday while gear manufacturer China Engine Group dropped from 6,110 to 4,770 won.
Investors were getting rid of the shares because they couldn’t trust businesses in China that they had little access to.
What can be done to resolve the China discount? Restoring investors’ confidence is an obvious answer while Chinese firms and the Korea Exchange (KRX) are seeking the best methods.
One solution is more communication with investors through investor relations activities and proactive public disclosures.
The KRX arranged an investor relations (IR) tour to seven Chinese companies between May 30 and June 3 during which China Ocean had opportunities to clarify the controversy over its fishing vessels.
Lee Gyu-sun, head of a small cap team at Daewoo Securities, said that some Chinese companies make more disclosures than their Korean counterparts, but they tend to be poorly translated, leading to misunderstanding.
“Each word in corporate disclosures should be carefully chosen for their meaning and cultural background. Poor translations prevent investors from properly understanding the companies,” Lee said.
Most Chinese firms currently hire Korean agents for IR activities, the largest of which is Value C&I, or operate a liaison office in Korea.
Another is to make their accounting practices more trustworthy by hiring Korean auditors.
United Technology Holdings, a polyurethane leather maker, had been under watch by the Seoul bourse after the auditor found its accounts did not qualify. Having exited KRX administration in April, the firm vowed to hire a Korean auditor and the same agent for both public disclosures and IR activities.
The Korean stock exchange is also pushing the listed firms to hire Korean nonexecutive directors, and China Gaoxian announced Friday that Kwak Kyung-jik, an experienced Korean lawyer, joined the board.
But industry insiders know that such measures won’t immediately reinstate investors’ trust in Chinese firms. Most importantly, the firms have to continue showing stable earnings in which investors can identify safety and opportunities.
