Chinese tea with Kirchhoff

The Chinese office of Kirchhoff Consult was set up in Suzhou, a city close to Shanghai renowned for its classical gardens, a decade after the Germany-based IR, communications and IPO advisory company first opened its doors in Hamburg in 1997. Today, Kirchhoff advises 90 percent of the Chinese companies listing in Germany. Klaus Kirchhoff, founder of the consultancy, recently came to Shanghai to be a panelist at the fourth annual Deutsche Börse China-Europe Equity Forum.

In front of a conference room full of Chinese small and mid-sized companies interested in going public on the Frankfurt Stock Exchange, Kirchhoff began his address on IR and IPOs with his favorite Chinese proverb: a man without a smiling face should not open up a shop. The following day, IR magazine caught up with Kirchoff to get his views on eastern companies going West and the situation closer to home.

At what stage in the IPO process do you normally get involved with these Chinese companies?

In most cases, we are invited when the bank is already on board and the process has started, just before the kick-off meeting with the lawyers, accountants, and so on. In some cases, we work not only in the communications field but also as IPO adviser, so we are on board much earlier than the others. We help the companies prepare for the IPO process, then we organize a beauty parade for all the advisers.

How do you prepare them for investor relations?

First we do an IPO workshop where we try to show them what it means to go public, with respect to the culture, the philosophy of the company and the structure of corporate governance. Then we cover all of the obligations regarding transparency and reporting in a one-day workshop for management members. At the end of it, they know everything about this process and the life of a listed company.

I am also involved personally with coaching the management: we prepare the presentation for roadshows and for investor meetings, and then I do some camera-based training with the managers – which is not easy with the Chinese, because I really have to start from the beginning. I say: put your feet flat on the floor, sit in an upright position, don’t slouch or look disinterested.

Then we spend a lot time with Q&A training, because you can hold a fantastic presentation but if you are not very good in the Q&A session, you will lose out.

Do Chinese managements have the same reservations as their European equivalents, or are there any China-specific hurdles you have to overcome?

There are some cultural differences: Chinese people are often very shy; they are not used to looking you in the eye when they talk to you. On the other hand, the training I give a small cap or mid-cap manager in Germany is not that far away from the training I provide to a Chinese manager.

Most Chinese managers are very open to consultancy, which is a good experience because quite often you don’t get that in Germany. German managers frequently think they know everything about everything, whereas the Chinese want to learn and they are open-minded. There tends to be more questions arising from the fact that they don’t know this subject. For example, they want to know what kind of questions investors will raise, or how long they have to speak in a roadshow.

We often hear Asia-based investors and analysts complain about a lack of access to senior management. How do you prepare Chinese management for the greater level of access expected by European investors?

It’s a big problem. We always recommend they use as many options as possible to meet with their investors. For example, we try to organize it so they can join all the investor conferences we have in Germany.

We advise them to do at least two roadshows a year for their major investors. We also train them to manage IR in a very simple way. When the process starts, I always tell them they should make some notes after receiving a business card: give an important investor an A, a not-so-important guy a B, and one who is not very interesting to them a C.

The A guys need to get access to management whenever they want it; the B guys can be handled by the IR manager and the C guys can be dealt with by a secretary. Access is a problem because meeting with investors is expensive and time-intensive. But the companies learn from us that this is one of the key success factors in establishing trust with their investors.

During the panel discussion at the forum, you said a lack of English-speaking board members can cause problems for many Chinese companies looking to list in Europe. What is your solution?

We try everything. It is better, from my point of view, for the CFO to be fluent in English but, at the very least, we say the firm should hire an English-speaking IR manger. But we also have 100 percent retention after the IPO: all our clients give us a contract for IR services, which means we do all the press work and the presentations for roadshows, we work on the Q&A, and so on. Our services, together with an English-speaking IR manager, means the company can deliver a very professional IR offering.

When do you suggest these Chinese companies begin building up their own IR team?

Normally, we advise them to do this during the IPO process, so the new IR manager can learn with us, and from us, about how to handle investor relations and how to establish a personal relationship in the market. But most of the smaller and mid-sized companies prefer to use us as their outsourced investor relations manager. This can work for a time, but you need to have your own IR manager on board eventually because investors don’t want to talk to us in Hamburg about something happening in Shanghai or Nanjing.

Another topic discussed more widely at the forum was whether or not it is best to hire an IPO-friendly CFO just prior to going public. Is a 'CFO/IPO' a solution to the language barrier?

It is not a good solution but it is a solution because it makes it easier to handle the IPO process. It’s not a good solution because it’s not the best way to build up trust with the investors. It is always a problem for the financial community when the CFO leaves the company a year after the IPO.

The first Chinese companies listed in Frankfurt in 2007. How have those stocks performed?

Not well – nearly parallel to the market. But we have to remember the Chinese companies were the only companies that went public at that time, so they were under pressure because of the market development. There were two that disappointed the market totally. But most of them have tracked the market and, when the market recovers, I think they will be more attractive and will profit more from the recovery than the average listed company.

What should your Chinese clients be doing in this volatile market from an IR perspective?

We tell them: do your homework, be professional and be active in investor relations. They need to do this in order to establish a long-standing relationship with the financial community and build up trust. Although it may not have an effect on the share price at the moment, they will profit from it later.

In 2001, after the stock market crash, those companies that didn’t give up and kept active with roadshows and so on came through the period much better than the others. I am convinced this is the best way to handle a difficult market environment.  

What has Chinese IPO activity been like in Germany in 2011?

We have helped three companies come to market so far this year: China Specialty Glass, Youbisheng Green Paper and United Power. When they were on their roadshows, the Sino-Forest case blew up in the US [Sino-Forest was accused of manipulating its numbers]. All over Europe, investors stopped giving new orders and those that had already given orders took them back.

So these companies had quite successful IPOs, but not as successful as they would have been without this case. In the end they raised about €30 mn ($41 mn), but it should have been more like €80 mn-€100 m.

Should Chinese private companies forget about listing in Europe for now?

What we always say, to all clients, is: prepare yourself for the IPO so that, when you have been through the process, you are fit not only for the IPO but also for the market. This is my experience after managing about 60 IPOs over several years. And this process is very good for the company: to focus on a good strategy, on the numbers, on a good accounting system. Prepare yourself because the time during which the window will be open for an IPO is now much shorter than it used to be.

What is the IR business like from German companies right now?

For the bigger companies, like the DAX companies, we work in different fields. For example, for one DAX company we created a new worldwide investor relations strategy, did investor targeting and prepared the roadshow. For another big company, we created the CSR strategy. Other times we do worldwide investor perception analysis. It is more project-led business with the bigger companies. One reason we focus on small and mid-sized companies is that they don’t have big IR teams, so they really need our support. For them, we do a total IR service.

Are German companies spending less money on annual reports now?

Yes. Our annual report business is stable but not growing strongly. We still have the same number of clients so that means budgets have come down. On the other hand, what we’ve lost on print reporting we’ve earned in online reporting. We also have good development in CSR and sustainability reporting, as more and more people see the opportunities offered by a strong CSR/sustainability policy.

Is the tendency to incorporate the annual report and the CSR report or are they generally separated out?

Some companies try to combine them, but that’s not what I mean by ‘integrated’ reporting. For me, integrated reporting means all the tools you use are integrated and carry the same messages. Both reports should be connected, with clear signposts about where further information can be found.

But I would always recommend having a separate annual report and CSR report, as well as a good online report platform. General investors are interested in some key aspects of CSR but not in a whole report about everything the company does in this area, so I would always have some aspects of the CSR report in the annual report. The separate report should be for those investors that are more deeply involved in CSR.

Is there a particular type of investor who is interested in CSR?

For 17 years I have sat on a judging panel for a German publication called manager magazin which gives out awards for annual reports. About five years ago I suggested incorporating some aspects of CSR reporting into our ranking criteria. But there was a very famous institutional investor also on the jury who thought this wouldn’t mean anything to anybody. A year or two later, he came to our meeting and said, ‘We have to incorporate CSR into the criteria.’ I asked why and his response was: ‘Because I was in New York on a two-day investor conference and the only topic was CSR.’

The market is changing. After all the crises we’ve had, it might be a good idea for a company to create a CSR strategy and to integrate it into the daily business, because it will achieve greater acceptance in the market. It will also help when the firm tries to recruit young talent or if it needs support from state officials – such as in the construction industry.

How do Chinese companies approach CSR reporting?

Some of my clients are very interested in this subject. We often integrate this aspect of sustainability into the roadshow presentations, provided there is something in the company to report. There are some Chinese companies that have a sustainability strategy already, even though they might be smaller.

A friend of mine is a consultant for the Chinese government on environmental aspects, so I know the state is really interested in this field. This is a huge challenge, as with everything in China, but it is starting to deal with it.

In the past you have been involved in bringing Israeli companies to IPO in Germany. At the moment it’s China. What attracts you to these challenges?

Twelve years ago, when I started with Israeli companies, I had the chance to enter Israel, to learn about the country and the people, and make friends there, so my business and personal interests came together. The same is true for China: I have been interested in Chinese culture and history for more than 40 years. I always dreamt of being here and now I can be here for business.

Where’s next?

Three years ago I opened an office in Turkey and now I am there every month. I love the country and the people and I would strongly recommend that European leaders integrate Turkey into Europe. But we have no leadership in politics at the moment; that is one of the reasons for the crisis we face.

The next country I am working on is Romania. This is also business combined with personal interests, political interests and cultural interests.

Are there any Turkish or Romanian companies looking to list in Germany?

There is one Turkish company we have been in the process of preparing for more than a year. We have selected the advisers, banks, lawyers and accountants. The due diligence is on track now and we are working on the prospectus. I hope the market will allow us to make that company public in the first quarter of 2012, as I am convinced it will open up the pipeline from Turkey.

This is interesting for German investors for two reasons. Firstly, they can invest in a company that is working in a market with fantastic growth – Turkey is now number one, ahead of China. Secondly, in Germany we have a very strong, powerful and rich Turkish community, so I’m sure I can create a strong retail business for these deals.

We did some research recently and the average retail quota in an IPO in Germany is between 4 percent and 6 percent. The retail quota of our IPOs is between 10 percent and 25 percent. Even in a deal worth €1.3 bn we reached 26 percent retail, raising about €400 mn, which is interesting for the Turkish business.

Is it preferable to have that level of retail involvement?

It is the best thing that can happen to a company, because retail investors are very loyal: they don’t sell the next day after reading something in the newspaper, unlike some of the sheep we have in the market.

Retail investors are very close to the company and want to stay with their investment. It is good for the CEO to have a 25 percent retail investor base because once a year at the AGM it gives him or her power and independence from the institutional investors.  

Also, it is good for pricing on the day of the listing. When the retail side is very strong you have a better discussion with the institutional investors about pricing, because you know that if they don’t accept the price, you can sell the shares to the retail investors.