Bottom line: The acceptance by Gree’s chairman of a surprise shareholder rejection over a controversial investment, and a muted sell-off in response to a short-seller attack on Huishan Dairy both signal growing maturity by Chinese stock investors.
A couple of stock stories in the headlines as the new week begins are spotlighting a nascent but encouraging sophistication of shareholders in Chinese-listed companies. Such investors are traditionally famous for a sheep-like mentality that sees them blindly pile into and out of stocks based on rumors, heard-on-the-street advice or even simply a name change, with little regard for reality about the company’s business prospects.
But perhaps these latest two incidents show a growing sophistication that could bring some much-needed stability to Chinese stocks, which are famous for their volatility. Leading the headlines is word that the chairman of home appliance giant Gree (Shenzhen: 000651) has accepted a recent rejection by shareholders over a controversial investment plan in an electric car company. At the same time, shareholders of Huishan Dairy (HKEx: 6863) have largely ignored a new report by notorious short-seller Muddy Waters, in contrast to earlier times when such an attack might have sparked a sheep-like panic causing the company’s shares to plunge.
Both of these stories come as China tries to internationalize its stock markets, partly to stabilize them and make them a place for serious investors rather than speculators looking to make some quick money. The latest move on that front saw international investors gain access to the Shenzhen stock exchange earlier this month via a Hong Kong-based program, though early interest has been limited due to uncertainty over China’s economy.
All that said, more fundamentals-based investing would certainly provide incentive for international buyers to take Chinese stocks more seriously, which is perhaps what we’re seeing with these latest two headlines. The first of those involves Gree, a household name known for its air conditioners and also its colorful and influential chief Dong Mingzhu, often called China’s most powerful businesswoman.
Gree shareholders gave Dong a sharp rebuff last month when they vetoed her plan to buy Yinlong, a maker of new energy cars. Such rebuffs are rare in China, where CEOs often run their companies like personal kingdoms with little regard for minority shareholders. In response, a determined Dong announced on Friday she was joining with 4 other companies to buy 22.4 percent of Yinlong in exchange for a 3 billion yuan ($435 million) capital injection. (Chinese article)
The reports indicate that Dong, who led this 5-member group, decided to make the investment personally rather than through Gree. Shareholders appeared to applaud that decision, bidding up Gree’s shares by 1 percent in what looks like a sigh of relief that the Yinlong tale might finally be over. I personally applaud both the Gree shareholders and Dong, the former for putting their foot down over what looked like a foolish investment and the latter for respecting their decision.
Next there’s the Huishan story, which actually involved investors based in Hong Kong where the company is traded rather than China. But it’s probably fair to say that a good portion of those investors have mainland connections, since the Hong Kong stock market is quite widely accessible to that group and also Huishan is a Chinese company that many on the mainland would be familiar with.
In this case, Muddy Waters put out a report questioning Huishan’s claim that it feeds most of its dairy cows using self-grown alfalfa. Instead, Muddy Waters said it found evidence the company bought a large portion of its alfalfa from third parties, casting doubts on Huishan’s broader finances. Muddy Waters made its claims at the end of last week, and Huishan issued a statement over the weekend calling the claims groundless. (Chinese article)
In this case the most revealing place to look for answers was in Huishan’s shares, which were down a relatively modest 5 percent in the final two trading days of last week on extremely high volume. Of course it’s still possible the shares could continue their sell-off in the current week. But the muted response, coupled with Huishan’s denial over the weekend, could easily be the end of the story, with Muddy Waters probably emerging as the big loser.
It’s been a while since Muddy Waters has made major headlines, but that was hardly the case 5 years ago. Back then the company was launching regular attacks on US- and Hong Kong-listed Chinese firms, often resulting in major sell-offs. This latest dud appears to show that investors aren’t so easily convinced anymore over this kind of “research”, and perhaps also suggests that Chinese firms are becoming more honest with their accounting. Either way, both trends are positive for Chinese stocks in general, and could signal that Chinese companies and investors are finally starting to grow up.