China’s stock markets have fared poorly enough in recent years for share prices at 136 listed firms to drop below their net asset values. Large steelmakers and shipyards are trading at the steepest discounts. State-backed steel giant Angang has a market capitalisation that equates to just 43% of the reported value of its net assets.
Lifeless valuations typically provide an incentive for restructuring work or buyouts. (Chinese firms delisting from US stock markets actually outnumbered the number that listed there last year.) But going-private is highly unusual in China’s own A-share market. Since PetroChina and Sinopec took private seven of their listed units in 2006, only one firm has been delisted after being bought out by its major shareholder, according to financial website Hexun.
Why is it so rare in China? Taking a state firm ‘private’ would imply the company had been badly managed and would be deemed a loss of face. Meanwhile the challenges of getting an IPO approved in the first place – typically there have been long queues to win the regulatory green light – means a listing is viewed as a valuable commodity in its own right and something that most companies try to hang onto.
The situation may change this year. Nanjing Tanker, a marine-freight unit under the country’s biggest logistics firm Sinotrans, is set to become the first central government-backed company to delist from a mainland stock market.
Regulations stipulate that listed firms with two consecutive years of losses have to stick the tag “ST” in front of their company names. This indicates “special treatment” and that a major restructuring is required. If a third consecutive year of losses occurs, the company has to undergo enforced delisting.
Nanjing Tanker has been carrying the inglorious ST tag since 2011 and the Jiangsu-based company is about to report the fourth consecutive year of losses. It issued yet another profit warning last month (it expects a net loss of Rmb1.27 billion for 2013 – around $207 million – after a loss of Rmb1.24 billion a year earlier) and its shares were suspended from trading last May. “We’ll be delisted according to securities market rules if the audited annual results show a loss,” Ding Wenjin, a Nanjing Tanker board member, has confessed to reporters.
Other lossmaking state-owned heavyweights are scrambling to avoid a similar fate. The quickest fix is parental assistance. In the past month, Angang and China Cosco, two of the biggest state firms facing the delisting danger, have said they expect to see a profit for 2013 (in both cases, for the first time in three years). How? Thanks to one-time asset injections from their unlisted parents.
Sinotrans, too, is a state giant that carries more than Rmb123 billion of assets. But it has decided not to help its troubled unit. As a result Nanjing Tanker said last week that it will write down the value of its fleet and commercial contracts by Rmb4.6 billion. According to National Business Daily, this is waving the white flag. “Nanjing Tanker isn’t even trying,” the newspaper said. “Rather than protecting its listing status, it has chosen to magnify its loss and step closer to delisting.”
As WiC has reported previously, a go-private for China Cosco might actually allow controlling shareholder Sasac – the body with oversight over China’s largest state firms – to take full control of the world’s second biggest shipping firm at a distressed valuation (see WiC201).
Now it seems Nanjing Tanker might take that precise route. “Rather than an enforced delisting, it is a more glorious exit for Sinotrans to take Nanjing Tanker private,” one of the company’s shareholders wrote on his Sina blog.
Regulators have also been conducting market consultations on how to encourage go-private deals. “There will be active restructurings among central government-backed enterprises this year,” the China Securities Journal suggests.
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