In a year full of surprises for China’s equity market, here’s another one to ponder: loss-making companies are some of the country’s best-performing stocks.
Not only have they trounced the Shanghai Composite Index with an average 60 per cent gain this year, money-losers are also outperforming China’s most profitable companies by 5 percentage points. In the US, by contrast, shares of loss-making businesses have tumbled an average 15 per cent.
While it is tempting to discount the outperformance as a sign of irrationality among China’s 97 million individual investors, there is a certain logic to it. Loss-makers are prime targets for Chinese policymakers seeking to improve the efficiency of state-owned companies and reduce industrial overcapacity via mergers. Reverse takeovers, meanwhile, are unlocking the value of stock market listings at businesses too far gone to repair.
Yet the risk for investors is growing. Several companies have come under fire from regulators this year after failing to follow through on restructuring proposals, while a KGI Securities analyst estimates that fewer than 10 per cent of unprofitable companies will succeed in restructuring. If China follows through on plans to make it easier for companies to list shares through initial public offerings, demand for reverse takeovers is likely to plunge.
“As an IPO registration system is being set up, we may see less speculation on shells,” said Ken Chen, a Shanghai-based analyst at KGI Securities. “If we look back three years later, we will probably find that less than 10 per cent of these loss-making companies were successfully transformed.”
Quick returns
The prospect of quick, event-driven returns has proven especially enticing for Chinese investors after the nation’s economic slowdown deepened and a US$5 trillion stock market crash undermined the appeal of a buy-and-hold approach. The Shanghai Composite, which tumbled as much as 43 per cent from its June peak, has gained 7.3 per cent this year.
Chinese stocks again edged up yesterday, with property shares surging on policy support hopes as well as signs that insurers are scrambling for stakes in major real estate firms.
The market was also aided by stabilising resource shares, bolstered by evidence that Beijing is accelerating consolidation among metal producers.
The Shanghai Composite Index gained 0.1 per cent, to 3,472.44 points.
In China, there’s no shortage of unprofitable companies to choose from. About 452 firms on mainland exchanges have reported trailing 12-month losses, accounting for about 16 per cent of overall listings. One of them, Luoyang Glass, more than quadrupled in Shanghai trading this year despite losing 162.3 million yuan in the 12 months to September.
Shares surged after the company agreed to shift loss-making assets to its state-owned parent.
“With a bleak economic outlook, rumours and restructuring stories become even more influential,” said Daniel So, a Hong Kong-based strategist at CMB International Securities.
Backdoor listing
At least 17 companies have completed reverse mergers this year, twice as many as last year, and another 26 deals are still pending, according to Bloomberg data. A record number of Chinese companies are seeking to delist from US bourses, with many of them planning to move their shares to mainland exchanges where valuations are higher.
Chongqing New Century Cruise, which operates river boat tours, lost 16m yuan in the 12 months to September but rallied five-fold this year. The stock jumped by the 10 per cent limit for 18 straight days after agreeing to be taken over by Shanghai Giant Network Technology, a developer of online games controlled by billionaire Shi Yuzhu, as part of a backdoor listing.
Not all takeover plans materialise. Zhejiang Honglei Copper has tumbled 33 per cent since the China Securities Regulatory Commission warned the company in August about failing to take action over a publicly announced acquisition. In September, the regulator fined the chairman of Sichuan Jinyu Automobile City (Group) for spreading fake news about the company’s reverse merger. Shandong Qixing Iron Tower, an unprofitable builder of transmission towers, that surged more than 400 per cent this year, said on November 28 that a purchase plan announced a year ago has yet to receive official approval.
Slowing growth
It is becoming harder for companies to rebound from losses amid the weakest economic growth in six years. Profits at Chinese industrial companies dropped 4.6 per cent in October and manufacturing conditions deteriorated last month to the weakest level in more than three years. Earnings have trailed analyst projections at a majority of index companies for eight straight quarters, while a majority of companies that were unprofitable in 2012 are still losing money.
Reverse mergers – used by privately held companies to gain a stock market listing without an IPO – will become less attractive if China adopts a US-style registration system where authorities do not determine the timing or valuation of deals. Under China’s current regime, companies have faced long regulatory delays and periodic market-wide freezes on share sales. Policymakers are ready to unveil plans for a registration system as soon as next week, Reuters reported on Friday, citing two unidentified people familiar with the matter.
“Shells will stop being a rarity under a registration system,” said Chen Xingdong, the Beijing-based chief China economist at BNP Paribas. “Overvalued small caps will gradually return to reasonable prices.”
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DEADPOOL & WOLVERINE
Starring: Ryan Reynolds, Hugh Jackman, Emma Corrin
Director: Shawn Levy
Rating: 3/5
COMPANY%20PROFILE
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UAE currency: the story behind the money in your pockets
The biog
Name: Sarah Al Senaani
Age: 35
Martial status: Married with three children - aged 8, 6 and 2
Education: Masters of arts in cultural communication and tourism
Favourite movie: Captain Corelli’s Mandolin
Favourite hobbies: Art and horseback ridding
Occupation: Communication specialist at a government agency and the owner of Atelier
Favourite cuisine: Definitely Emirati - harees is my favourite dish
SPECS
Engine: Two-litre four-cylinder turbo
Power: 235hp
Torque: 350Nm
Transmission: Nine-speed automatic
Price: From Dh167,500 ($45,000)
On sale: Now
AS%20WE%20EXIST
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Company%20Profile
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COMPANY PROFILE
Initial investment: Undisclosed
Investment stage: Series A
Investors: Core42
Current number of staff: 47
Moon Music
Artist: Coldplay
Label: Parlophone/Atlantic
Number of tracks: 10
Rating: 3/5
Company%20Profile
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Top financial tips for graduates
Araminta Robertson, of the Financially Mint blog, shares her financial advice for university leavers:
1. Build digital or technical skills: After graduation, people can find it extremely hard to find jobs. From programming to digital marketing, your early twenties are for building skills. Future employers will want people with tech skills.
2. Side hustle: At 16, I lived in a village and started teaching online, as well as doing work as a virtual assistant and marketer. There are six skills you can use online: translation; teaching; programming; digital marketing; design and writing. If you master two, you’ll always be able to make money.
3. Networking: Knowing how to make connections is extremely useful. Use LinkedIn to find people who have the job you want, connect and ask to meet for coffee. Ask how they did it and if they know anyone who can help you. I secured quite a few clients this way.
4. Pay yourself first: The minute you receive any income, put about 15 per cent aside into a savings account you won’t touch, to go towards your emergency fund or to start investing. I do 20 per cent. It helped me start saving immediately.
Why does a queen bee feast only on royal jelly?
Some facts about bees:
The queen bee eats only royal jelly, an extraordinary food created by worker bees so she lives much longer
The life cycle of a worker bee is from 40-60 days
A queen bee lives for 3-5 years
This allows her to lay millions of eggs and allows the continuity of the bee colony
About 20,000 honey bees and one queen populate each hive
Honey is packed with vital vitamins, minerals, enzymes, water and anti-oxidants.
Apart from honey, five other products are royal jelly, the special food bees feed their queen
Pollen is their protein source, a super food that is nutritious, rich in amino acids
Beewax is used to construct the combs. Due to its anti-fungal, anti-bacterial elements, it is used in skin treatments
Propolis, a resin-like material produced by bees is used to make hives. It has natural antibiotic qualities so works to sterilize hive, protects from disease, keeps their home free from germs. Also used to treat sores, infection, warts
Bee venom is used by bees to protect themselves. Has anti-inflammatory properties, sometimes used to relieve conditions such as rheumatoid arthritis, nerve and muscle pain
Honey, royal jelly, pollen have health enhancing qualities
The other three products are used for therapeutic purposes
Is beekeeping dangerous?
As long as you deal with bees gently, you will be safe, says Mohammed Al Najeh, who has worked with bees since he was a boy.
“The biggest mistake people make is they panic when they see a bee. They are small but smart creatures. If you move your hand quickly to hit the bees, this is an aggressive action and bees will defend themselves. They can sense the adrenalin in our body. But if we are calm, they are move away.”
FROM%20THE%20ASHES
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The specS: 2018 Toyota Camry
Price: base / as tested: Dh91,000 / Dh114,000
Engine: 3.5-litre V6
Gearbox: Eight-speed automatic
Power: 298hp @ 6,600rpm
Torque: 356Nm @ 4,700rpm
Fuel economy, combined: 7.0L / 100km
COMPANY%20PROFILE%20
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Top%2010%20most%20competitive%20economies
%3Cp%3E1.%20Singapore%0D%3Cbr%3E2.%20Switzerland%0D%3Cbr%3E3.%20Denmark%0D%3Cbr%3E4.%20Ireland%0D%3Cbr%3E5.%20Hong%20Kong%0D%3Cbr%3E6.%20Sweden%0D%3Cbr%3E7.%20UAE%0D%3Cbr%3E8.%20Taiwan%0D%3Cbr%3E9.%20Netherlands%0D%3Cbr%3E10.%20Norway%0D%3Cbr%3E%3C%2Fp%3E%0A
Directed: Smeep Kang
Produced: Soham Rockstar Entertainment; SKE Production
Cast: Rishi Kapoor, Jimmy Sheirgill, Sunny Singh, Omkar Kapoor, Rajesh Sharma
Rating: Two out of five stars
How to protect yourself when air quality drops
Install an air filter in your home.
Close your windows and turn on the AC.
Shower or bath after being outside.
Wear a face mask.
Stay indoors when conditions are particularly poor.
If driving, turn your engine off when stationary.
Name: Brendalle Belaza
From: Crossing Rubber, Philippines
Arrived in the UAE: 2007
Favourite place in Abu Dhabi: NYUAD campus
Favourite photography style: Street photography
Favourite book: Harry Potter
COMPANY PROFILE
Name: HyperSpace
Started: 2020
Founders: Alexander Heller, Rama Allen and Desi Gonzalez
Based: Dubai, UAE
Sector: Entertainment
Number of staff: 210
Investment raised: $75 million from investors including Galaxy Interactive, Riyadh Season, Sega Ventures and Apis Venture Partners
COMPANY%20PROFILE
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Company%20profile
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What are the GCSE grade equivalents?
- Grade 9 = above an A*
- Grade 8 = between grades A* and A
- Grade 7 = grade A
- Grade 6 = just above a grade B
- Grade 5 = between grades B and C
- Grade 4 = grade C
- Grade 3 = between grades D and E
- Grade 2 = between grades E and F
- Grade 1 = between grades F and G
COMPANY%20PROFILE
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