Chinese chasing European capital

Every weekend in the center of People’s Park in Shanghai, local parents place placards with details of their unmarried offspring printed or scribbled on the front. Transparency is key for the crowds of like-minded parents who block the tree-lined paths to play cupid for their grown-up children.  Degrees and exam grades are disclosed alongside heights, weights and whether the son or daughter in question still lives at home. A photo album is available on request.

Every September for the past six years, Deutsche Börse has played a somewhat similar role for Chinese small and mid-sized companies looking to list or raise extra capital in Frankfurt, Germany. This year’s event, held at the slightly more auspicious Shangri-La hotel in Pudong, attracted a room full of Chinese business people keen to learn how to attract investment from Europe.

Why they would want to was not immediately clear. The overriding message from the podium was: the IPO market in Europe is currently closed, please go home and prepare for when it might reopen. Exactly when that might be, nobody knows.

The future of Chinese companies in Europe is equally uncertain: ever since the Sino-Forest accounting scandal blew up in the US earlier this year, Chinese firms have become the least popular guests at the investor party.

‘This year was supposed to be the best year ever for Deutsche Börse in terms of Chinese IPOs,’ says Alexander von Preysing, head of issuer services at Deutsche Börse. ‘If you look only at the number of IPOs in the first half of this year, it is an upward trend and there are a lot still in the pipeline. But due to the volatility and turmoil in the financial markets, the capital those companies have been able to raise has been disappointing for us, for investors and for the companies themselves.’

To put this in context, €1.6 bn ($2.2 bn) has been raised by primary issuers on the Frankfurt Stock Exchange so far this year, in comparison to the €17 bn placed by companies already listed with Deutsche Börse.

‘The IPO pipeline is also blocked at the moment,’ von Preysing continues. ‘All the companies are postponing their IPO and preparing for when the window reopens.’

Getting together
As for the Chinese companies, there may be a block in the pipeline in Europe, but the backlog of companies waiting to list in China is as long as four years, according to Oliver Kuan, CFO of United Power, the Germany-listed Chinese manufacturer of generators. That is far too long to wait for capital-hungry Chinese companies being wooed by a growing list of western exchanges.

Deutsche Börse says New York exchanges have much higher listing fees and a higher regulatory threshold. The increased time difference is also an issue, Kuan points out, although that did not stop NASDAQ OMX signing a cooperation agreement with Beijing’s Zhongguancun National Innovation Demonstration Zone in late September.

To avoid the shaky relationship between Chinese companies and German investors hitting the rocks, Deutsche Börse is looking to reacquaint these estranged parties at the German Equity Forum in Frankfurt in late November. Most if not all of the 34 Chinese companies listed on the Frankfurt exchange will be in attendance, according to von Preysing, where they can expect the introductions to investors to be more interventionist than the comparatively safe forum in Shanghai.

On the agenda for this year is a four-hour-long ‘speed investing’ session, where a select number of investors and companies rotate around 20-minute meeting slots. In a related twist, there will also be a ‘matching dinner’, where 50 investors and 50 firms will swap dinner tables between courses, with no advisers or intermediaries present.

The pull of Europe
Kuan attended the September forum and will also be at the Frankfurt forum in November. The half- Chinese, half-German former Deutsche Bank investment banker became CFO of United Power in January, five months prior to the IPO in Frankfurt in June 2011. He recently spoke to IR magazine about the attraction of Europe for Chinese companies.

United Power’s first quarterly results were announced at the end of August. Revenues are up €50 mn, a 23 percent like-for-like increase on last year. What kind of post-results conversations did you have with investors and analysts?

The numbers were good, but our half-yearly results coincided with darkening clouds on the economic horizon, so the most frequently asked questions were from investors who were really eager to get early warning signals from the companies themselves. They wanted to see whether this is only a sentiment or whether it is already translating into a decrease in orders. Are customers getting more cautious? Are we seeing any impact now on our business?

We haven’t seen that yet. Sentiment obviously also affects consumer behavior and part of our business is driven by consumers but we haven’t seen any concrete evidence that the economic environment is going to deteriorate significantly.

Stock is down 34 percent since the IPO. How do you explain that to existing and prospective investors?

Our IPO coincided with a general drop in the market, so that’s clearly one of the key factors.

The general market in Germany has been down by some 30 percent since its height this year. And the other thing is that there has been plenty of negative news coverage about Chinese companies listed abroad. That has had a particular effect on all Chinese companies.

Additionally, we are still a relatively small-cap stock. I hope that will change sooner or later, but several funds have been seeking to withdraw from these types of stocks, because they are less liquid than the larger ones. These are all factors that contributing to the share price.

It’s not a pleasant experience when your stock price comes down, but what we can do right now is, firstly, keep focusing on operations and keep producing the numbers; and secondly, keep communicating it to the market. We hope that, over time, this will reverse the trend and get real value for what we think the company is worth.

What are the main attractions of Europe for a Chinese company?

There is a backlog of IPOs in China; the listing process takes much longer there. If you are a small entrepreneurial company growing rapidly you can’t wait two, three or four years to list: you need the capital to grow now.

Another important reason for us is that Europe has historically been our most important market and it will remain the most important market for the  foreseeable future. Also, we manufacture generators and European investors understand the manufacturing and engineering industries quite well. Those are the main factors for us. The other attraction is that, from a global visibility point of view, listing in Germany offers good opportunity.

How does it work with your investors being in Europe?

The time difference and distance always create friction and make for a more complicated relation- ship, but it is manageable. In fact, from the aspect of the time difference, China and Europe works better than China and the US.

Because United Power has a lot of European customers, we are also quite used to talking to Europe anyway. We are used to going out to Europe on a frequent basis, not only for IR reasons.

There are obviously some Chinese companies for which the business is purely China and they basically just go over to Europe to meet investors. It’s different for us, however: we not only meet investors in Europe, we also meet customers there, so we tend to go to Europe regularly.

Do any of your European investors visit you in China?

We’d like to encourage them to come over. It would be very good for more investors to come out to China and see a number of firms listed here, including us.

That would enable them to get a feel not only for the companies themselves but also for China and the environment in which those companies operate. I think that would be very useful.