A funny thing happened on the way to the construction of one of China’s newest mega-complexes, the Guangzhou IFC Mall in the southern megacity of Guangzhou.
What started out as a typical local business leader’s attempt to support the project – using money from the publicly traded company he founded – sparked a shareholder revolt. But then things took a strange and unexpected turn when, instead of ignoring his shareholders, the company’s president actually listened.
This particular story involves Jiumaojiu International (OTCPK:JIUMF, 9922.HK), operator of the famous Tai Er restaurant chain known for its specialty “sauerkraut fish”. But the story – at least the first part of it – could really apply to any of the hundreds of listed Chinese companies whose founders are often also their controlling shareholders.
These founders often treat their companies like personal fiefdoms, sometimes using them to do things that benefit them personally, even if those actions have little or no benefit for their minority shareholders. This particular trait is one of the main reasons why overseas-listed Chinese companies are viewed with suspicion by stock buyers, who essentially realize that they are giving up their right to influence management when investing. .
But this latest story shows that perhaps at least some company founders are beginning to realize that this kind of practice is unacceptable and irresponsible to the shareholders they are meant to serve. It can also be expensive, as Jiumaojiu founder and chairman Guan Yihong quickly discovered.
The story began last week when Jiumaojiu announced he would pay up to 1 billion yuan ($140 million) for a 26% stake in the company developing the Guangzhou IFC Mall project in his hometown of Guangzhou. The company explained that it planned to move its headquarters to the complex, stressing that it was necessary to maintain its reputation as an avant-garde and trendy restaurateur.
But investors didn’t quite see it that way. They expressed their displeasure by selling the shares of Jiumaojiu the next day, which caused the stock to drop 20%. This resulted in a loss of approximately HK$4.6 billion ($586 million) in the company’s market value and a personal loss of $240 million for Guan due to his ownership. of 41% of the shares of Jiumaojiu. Both of these figures were well above the proposed investment size of $140 million.
Perhaps the personal loss was what made Guan think twice about making this decision.
Whatever the reason, the company quickly released another announcement earlier this week, saying it had changed its mind and would no longer invest in the project. Instead, he said, Guan would make the investment personally using some of his other assets. Unsurprisingly, shares of Jiumaojiu rallied after the second announcement and have now regained most of the ground lost after the initial sell-off.
To understand what was probably going on here, one has to realize the enormous importance of good government relations to doing successful business in China. Jiumaojiu is based in Guangzhou and therefore relies on the local government for all kinds of support – from obtaining the necessary permits to help from the local tax office – to ensure that its operations run smoothly.
At the same time, China’s private real estate market is currently experiencing the worst downturn in its brief history. This slowdown has caused many projects to stall midway through development due to lack of funds, with residential developments being the most affected.
We don’t know the status of the Guangzhou IFC Mall project, which is still under construction and expected to be completed in 2026. But it’s probably not unreasonable to guess that it might have run into financial difficulties in the climate current. As the head of a large local company with lots of money, Guan may have personally thought he could help the project by donating his company’s funds, and such a decision may have even been ” suggested” by the local authorities.
Ultimately, we can’t completely blame Guan for his actions, which were likely a major government relations exercise for the benefit of both Jiumaojiu and himself personally. But its use of Jiumaojiu funds for the financial year seems highly irresponsible, especially in the current climate where the company is facing its own business downturn.
Hopefully other Chinese business leaders will take note of this example and think twice before using their publicly listed companies’ money to make similar questionable investment decisions. As the case of Jiumaojiu shows, such decisions could be detrimental not only to the company but also to the personal wealth of the company founder.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.