Dec 26, 2012 01:35 PM

After an IPO Rush, a Factory Town's Hangover


A shop manufacturing plant of a Jinjiang-based sportware company

(Beijing) -- It seemed the right thing to do in 2001 when officials in the factory city of Jinjiang opened a special office that actively encouraged local companies to list on stock markets.

Jinjiang, population 2 million, is an important manufacturing base on the Fujian Province coast. Its economy relies on a diverse mix of garment and shoe factories, including several profitable makers of sportswear.

City government policies promoted fund-raising on stock markets, both domestic and foreign. And over the past decade, dozens of companies responded. At last count, shares in at least 30 local companies were trading on bourses from Singapore to Frankfurt.

Yet in pursuit of IPOs some companies sacrificed fiduciary integrity. Cash raised on stock markets spurred expansions that choked local industries with overcapacity. And some city officials gave more attention to boosting tax receipts than sustainable development.

In many cases, enthusiastic investors who helped pump up prices on the day of a stock debut were later disappointed when shares slumped.

Some Jinjiang companies have started teetering toward delistings. For instance, four Jinjiang-based companies that listed on the Frankfurt Stock Exchange have seen their share values cut in half since launching IPOs.

"So many companies listed overseas in recent years," said Xie Luwei, former head of the Jinjiang government's business and commerce bureau. "And many of them may face delistings, after only a few years."

Why the rush to markets? Yan Chengkuang, director of the city's economic and trade bureau, said implementing government policies that channeled companies into capital markets was a logical step in a city that for decades has pushed factory and economic growth.

A Yan colleague told Caixin the economic bureau functions as a one-stop shop for IPO advice. It gives companies up-to-date information about overseas market rules, local subsidies and preferential access to land for factories. It also offers guidance for companies looking to restructure in the run-up to an IPO.

But good intentions and yeoman efforts at the commerce bureau have failed to silence warnings about the Jinjiang model – an anomaly in China, where most companies list on mainland bourses – as well as suspicions among global investors who wonder what's really driving Chinese companies to list on foreign stock markets.

Business Model

In addition to the estimated 30 Jinjiang companies already trading on bourses worldwide, with a combined market capitalization of about 180 billion yuan, another 107 have set a course for future IPOs, according to government information.

Some companies have listed close to home on the Shanghai A-share market or in Hong Kong. But many others have floated stock in Taiwan, Malaysia, the United States, Singapore and Germany.

Actually, no one really knows how many Jinjiang companies are listed at home and overseas, said Ni Zhongsen, chairman of the brokerage Hengrun Capital, which has helped many local companies go public.

Examples of IPO success include sporting products maker Anta Sport, personal care products company Hengan Group, and sportswear specialist Goldrooster Sport Co.

Goldrooster listed on the Frankfurt bourse last May and sold 720,000 shares at 4.10 euros each, raising about 1.88 million euros. The company says it has a worldwide sales network and 1,344 retail outlets in China. It also takes pride in a design team that dreams up unique products.

But Goldrooster's business model is controversial. In addition to original designs, the company makes copycats of famous-brand clothing. Moreover, a source close to the company said its IPO plan changed several times before executives decided to list in Frankfurt because the exchange's IPO standards are more relaxed than others.

Goldrooster is not an exception in Jinjiang, where many clothing firms have adopted a similar growth model that started with foreign exports of products that imitate famous brands. Moreover, local sportswear producers win supply contracts and market awareness by working with sporting event sponsors.

Not far from Goldrooster's plant is another Frankfurt-listed sportswear maker, Kuaijiezou Sport Apparel Co. In July, the company launched an IPO at 5 euros per share, raising 5.3 million euros. But just a month later, the share price had declined more than 50 percent.

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