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A trade on Beijing’s ‘third board’ makes team the world’s most valuable club

Football w

Evergrande Taobao celebrates

Are China’s Super League champions Guangzhou Evergrande Taobao really the most valuable football club in the world?

This claim was made by Xinhua news agency, thanks to the “price-discovering power” of the National Equities Exchange and Quotations (NEEQ), an over-the-counter bourse in Beijing known as the New Third Board (i.e. the third stock exchange after Shanghai and Shenzhen).

The football club, whose co-investors are Guangzhou-based property developer Evergrande and the internet giant Alibaba, went public on the NEEQ in November. But the new listing didn’t result in a single trade until last week, when 36,000 shares changed hands for Rmb1.98 million ($300,000). This maiden transaction valued the club at $3.35 billion, which compares with New York-listed Manchester United’s $2.35 billion valuation (as of this week). Real Madrid of Spain is valued by Forbes at $3.26 billion.

Pundits from the footballing world have scoffed at the excitement in the Chinese media, pointing out that Manchester United’s revenues over the past year were $700 million, or about 10 times more than Evergrande’s, while Real Madrid made more in operating profit than Evergrande managed in revenues last year.

The Evergrande trade probably says more about how the New Third Board functions. “This is a market which shows no sign of reason,” Netease Sports warns, referring to the fact that Xu Jiayin, the controlling shareholder, only spent Rmb20 million to acquire the club back in 2010.

On paper, the club’s value has surged more than a thousand-fold in six years. But unless there are more trades this ‘”flash valuation” is meaningless, Netease Sports thinks.

Unlike some of its NEEQ-listed peers, Evergrande Taobao hasn’t bothered with the services of a marketmaker to boost liquidity for its trading. And in the case of the single transaction so far, the identities of the buyer and seller haven’t been made public.

In fact, it’s relatively easy for insiders to play with NEEQ share prices. For example, Alibaba’s Jack Ma could sell 36,000 shares in Evergrande Taobao to Xu Jiayin tomorrow for $600,000 and the company’s market value would theoretically double again.

According to Sina Finance, it is not uncommon for NEEQ-listed firms to beef up their nominal values via repeated private placements of shares. The stock is typically sold to ‘independent third parties’ willing to pay steep premiums.

“This is easier than taking off your pants and farting,” the columnist at Sina Finance quips.

“A user manual for NEEQ bosses [reads like this]: Give me Rmb20,000 and I can add Rmb7 billion to your company’s market value.”

The NEEQ was founded in 2013 (for an earlier mention, see WiC289) with looser listing requirements than the A-share market in Shanghai. Supposedly this is to assist start-ups in raising funds from more sophisticated investors. NEEQ firms are then expected to upgrade to the Shanghai and Shenzhen stock exchanges at a later date. But many have been reluctant to depart, preferring to stay in Beijing.

Of the 568 US dollar billionaires in Hurun’s latest China rich list, seven come from NEEQ companies. The richest is Wu Gang, a former executive at the China Securities Regulatory Commission and the founder of JD Capital, a private equity firm. It was one of a number of private equity outfits to float on NEEQ over the last two years, until regulators stepped in to guide the bourse back towards its tech sector roots.

Wu is now planning to migrate his firm to the Shanghai stock exchange by means of a reverse takeover of a property firm. However, as Sina Finance reports, the backdoor listing proposal now seems to be under investigation by his former employer, the CSRC.

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