Caixin
Nov 28, 2018 09:05 PM
FINANCE

Shareholders Bail Out as Local Governments Bail In

Concern is mounting that big shareholders are taking advantage of price gains triggered by loans from government-backed rescue funds to offload their stakes. Photo: VCG
Concern is mounting that big shareholders are taking advantage of price gains triggered by loans from government-backed rescue funds to offload their stakes. Photo: VCG

* Major shareholders and company executives have sold shares worth a total of 11.2 billion yuan ($1.61 billion) so far this month, almost triple the amount in all of October

* Analysts say selling shares after a government bailout is unethical and isn’t good for the company long-term

(Beijing) — Three institutional investors in Poten Environment Group Co. Ltd. have put plans to sell their shares in the company on ice after a public outcry forced them to back down, underscoring market sensitivity to stock disposals amid the government’s ongoing bailout campaign.

Their retreat comes amid growing concern that big shareholders are taking advantage of price gains triggered by loans from government-backed rescue funds to offload their stakes. Major shareholders, those with a stake of 5% or more, and company executives have sold shares worth a total of 11.2 billion yuan ($1.61 billion) so far in November, almost triple the 4.2 billion yuan in October, according to data compiled by iFind, a financial data provider.

Local authorities and financial institutions started to set up rescue funds in October at the urging of the central government as part of a campaign to help stabilize the stock market and restore confidence after the benchmark Shanghai Composite Index sank to a four-year low. The index, which fell as much as 25% between Jan. 1 and Oct. 18, has since risen by 8.7% after Vice Premier Liu He and other top policymakers stepped in to calm the markets and promise help. The funds are supposed to help privately owned listed companies overcome short-term financial problems and relieve pressure caused by major shareholders offering their stakes as collateral for loans.

Poten Environment, a Beijing-based water management company; Soling Industrial Co. Ltd., a Shenzhen-based manufacturer of information and entertainment systems for cars; and Guangdong Zhengye Technology Co. Ltd., a Dongguan-based manufacturer of precision inspection equipment, are among the listed companies whose shareholders have sold their shares, or are planning to do so, after their businesses were earmarked for bailout funds.

Wrong signal

But their actions have been criticized by retail investors and analysts who say such sales undermine the purpose of the government rescue funds and send the wrong signal to other investors.

“Main shareholders selling their stocks is a very poor signal to send to the market,” Francois Perrin, portfolio manager responsible for Greater China at Sweden-based asset manager East Capital, told Caixin. “They should be under a lockup period until the share-pledge ratio is coming down, and that should be part of any revision” to the government’s support strategy, he said.

Such sales risk undermining the effectiveness of the bailout and should be prohibited, said Hao Hong, chief strategist at Bank of Communications International Holdings Co. Ltd. in Hong Kong. “Why should the funds continue to bail them out if the owners are leaving so quickly?” he told Caixin.

“It shows the owners of the companies are not running the firm for shareholders. They are only there for quick personal gains. Anyone who receives bailout funds should sign a pledge not to liquidate their own positions. It’s unfair for contributors of the funds and the rest of the shareholders who are left behind.”

Poten Environment is one of the main companies under the spotlight. On Nov. 19, its shares jumped 8.5% to 18.01 yuan, a four-month high. The same evening, it notified the Shanghai Stock Exchange that three of its institutional shareholders planned to sell their combined 31.35% stake in a five-month window from Dec. 12 to May 24 to fulfill “their own cash needs.” The shares slumped 10% the next day.

The announcement came less than two weeks after the Beijing government’s State-owned Assets Supervision and Administration Commission put out a statement (link in Chinese) about its bailout fund for local listed companies, which contained the news that Bank of Jiangsu’s Beijing branch had agreed to lend Poten Environment 50 million yuan, with another 50 million yuan promised.

The three investors — SDIC Fund Management Co., Shanghai Fosun Chuangfu Equity Investment Fund, and Pingtan Xinfa Huize Investment — bought their shares before Poten Environment’s initial public offering in February 2017 and paid well below the offer price of 6.74 yuan. Pingtan Xinfa, for example, paid 1.45 yuan per share for 21 million shares, according to Caixin calculations based on the company’s prospectus. The shares were subject to a lockup period, which meant they couldn’t be sold until February 2018.

But the shares were suspended at 26.2 yuan in January at the company’s request because it was planning some investment projects. When trading resumed on May 22, the shares jumped to 31.59 yuan but then sank along with the stock market and were trading at 11.82 yuan by mid-October.

After Poten Environment announced the three investors’ share-sale plan, the stock exchange requested additional information on Nov. 21, including the source and use of the rescue loan, why the funds were offloading their shares, and whether insider trading was involved.

Causing chaos

When the company responded later that day, the shareholders had already backed down, stung by the public outcry over their planned sale and the regulator’s investigation. They pledged not to sell their shares within the next six months “to show their support for the firm’s long-term development and to avoid causing unnecessary chaos in the market.”

Shenzhen-listed Soling Industrial is another firm that has come under scrutiny. Its shares rose 17% from an Oct. 16 closing low of 5.90 yuan to 6.91 yuan on Oct. 24, partly on speculation in the media that it was on a list of companies that would receive money from government-backed bailout funds. That night, it put out a stock exchange announcement in response to the media reports, confirming it was in talks with Shenzhen High-Tech Investment Group Co. Ltd., a participant in the Shenzhen government’s billion-dollar rescue fund. But it said it had not received any money, and there was no certainty it would.

On Oct. 27, the company announced that its seventh-largest shareholder, Xiao Xingjie, had applied to sell 1.79 million shares out of his total holding of 3.9 million because he needed the cash “for personal reasons.” Then, on Oct. 30, it informed the stock exchange that Wu Wenxing, a senior executive, was applying to sell his entire holding of tradable shares, amounting to 0.35% of the company’s total shares. It said Wu needed the cash for personal reasons. The shares were sold on Nov. 20, raising 2.56 million yuan for Wu.

Shenzhen-listed Zhengye Technology, which produces X-ray and laser-cutting machines, put out two statements on Nov. 8 and 9 saying it had secured money from two local government-backed funds, and announced on Nov. 12 it had received a total of 416 million yuan. The shares had jumped 17% from an Oct. 18 low of 17.96 yuan to 21.05 yuan on Nov. 15. From Nov. 15 to 21, seven people — executives or their relatives — sold shares to pay taxes and repay loans, according to statements from the company. Data from iFind show the disposals raised a combined 6.05 million yuan.

“These shareholders are not breaking the law, and it’s quite common for shareholders to reduce their stakes,” said Zheng Jisha, an analyst with China Merchants Securities Co. Ltd. “But selling shares when prices rise after the company receives money from the government is not ethical, and it’s bad for the long-term development of the company.

“If major shareholders are dumping their shares, it affects investor confidence and share prices, which will harm the interests of small investors.”

Lin Jinbing contributed to this report.

Contact reporter Liu Jiefei (jiefeiliu@caixin.com)

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