Banking & Finance

Payback time

ChiNext companies are dishing out big dividends

Payback time

Last month, Shanghai Bestway released ambitious investment plans to expand into yacht manufacturing. But a few days before it announced its grand plans, the marine engineering design firm had published its first annual report since listing on ChiNext ­– China’s growth enterprise board in Shenzhen – which revealed that the company had given away 70% of its 2009 net profits in the form of dividends. Surely a ‘growth enterprise’ firm should be using its profits to build for the future, and not directing the money so immediately into shareholder pockets?

Perhaps not. A number of companies listed on the ChiNext board have been releasing their first annual reports since listing. And it has become apparent that big dividend payouts are quite common. Out of the 46 companies listed on ChiNext, 43 turn out to have paid dividends in their first year. Although most companies were not quite as generous as Bestway, taking care of the early investors seems to have been a priority. Chinese media dubbed Tavrida Electric the meanest company in the group, yet it still managed to achieve a dividend payout ratio of 30.25%.

Some are concerned that, by diverting so much capital in the direction of shareholders, the newly listed firms are subverting much of the original purpose of the ChiNext – to provide capital for the expansion of young companies with competitive products and innovative business models.

As Ding Yuan, a professor of accountancy, told Southern Weekend: “With such excellent growth, the chicken can remain to lay more eggs. So what is the hurry to divide the chicken between the investors?”

One of the main reasons for the rush to pay dividends is that the practice allows pre-IPO shareholders to profit from their holdings. Most are unable to sell their stakes outright, due to lock-up periods. Another advantage to shareholders of receiving dividends is that they are only subject to 10% tax, compared to the 20% levy that is charged when the shares are sold outright.

The current dividend burst might well be in the short-term interests of shareholders, of course. But it may not bode quite as well for the long-term health of the companies involved.

If there’s a consolation, however, it could be that potential longer-term investors have wised up to what’s going on. A few days after Bestway released its annual report in April, the stock reached an all time high of Rmb41.78 a share, only to fall to just over Rmb25 this week.

This seems to be a common trend for shares on the ChiNext – with individual falls in stock prices often showing a much steeper decline than the overall market.

One interpretation on the timing too: growth investors, having made the effort to read the annual reports, may well be wondering if the ChiNext companies are going to grow as far and as fast as they had originally hoped. If the conclusion is negative, many may be choosing to look for their returns elsewhere…

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