Beware of the listing trap

Since the first batch of GEM companies went public on October 30, 2009, nearly 300 companies have been listed on GEM. The original intention of the establishment of the Growth Enterprise Market is to promote the accelerated development of high-tech enterprises by means of marketization, and to establish different levels of China's capital market. However, under the imperfect market environment and regulatory system, chaos emerges on the ChiNext: executives resign frequently to cash out, and some executives even resign 18 days after the company's listing. According to Shenzhen Stock Exchange statistics, as of the end of May this year Among the 224 listed companies on the board, 327 executives resigned and cashed out; they used over-raised funds to buy land and properties. For example, Shenzhou Taiyue, which once issued a price-earnings ratio of 68.8 times, bought a so-called office building land in Beijing for 290 million, accounting for its Excessive fundraising by nearly 15%; corporate governance is not up to standard, such as Aier Ophthalmology, which was found to have problems in corporate governance, internal control system, use of raised funds, information disclosure, financial management and accounting within half a year of listing. Became the first company on the GEM to be required to rectify; excessive financial packaging for listing, such as Wangsu Technology, one of the first listed companies on the GEM, broke out the scandal of loss of main business during the listing season...

Many small and medium-sized enterprises Going public is seen as a shortcut to success. However, judging from these facts, going public also has hidden traps. If you accidentally fall into it, not only will the dream of becoming bigger and stronger be difficult to achieve, but it will even be stagnant until it is eliminated by the market. Why going public is indeed a shortcut to success for some companies, while it means the beginning of a nightmare for others? What pitfalls might companies encounter in the process of going public and in their subsequent operations? How to avoid these traps?

In response to these issues, the "Dialogue" column of this issue specially invites Professor Wu Lidong from the Corporate Governance Research Center of Nankai University, Zhu Junhong, Partner of the RMB Fund of Gobi Partners Co., Ltd., Zhu Junhong, President of Shanghai Ganglian E-Commerce Co., Ltd., and Jiangsu Pacific Elite Dong Yi, Secretary of the Board of Directors of Forging Technology Co., Ltd., discussed the answer together.

Why do companies change their faces when they go public?

China's Growth Enterprise Market has been brewing for ten years before it was officially established, but there have been many problems in the two years since its launch. Many GEM companies changed their faces when they went public. They originally had high growth potential, but their performance declined as soon as they went public, and there were scandals such as executives resigning to cash out, financial fraud, and non-disclosure of related-party transactions. For these companies, what exactly is GEM?” Enchanting", causing them frequent problems?

Wu Lidong: The difference between GEM and the main board is that the main governance mechanism of the former should be solved by the market, that is, the market system is relatively complete and information is relatively transparent, and investors will decide whether to invest in a certain enterprise. However, our capital market is still in the development stage, and there are still many imperfections. In such a big environment, some companies do not want to be a century-old store, but in many cases just take the listing as the end point, and the operators cash out and leave after the listing. The reason why this phenomenon occurs is that most companies are still general-purpose assets, and the asset value of companies does not contain much of the inner spirit of entrepreneurs.

A real entrepreneurial project should contain the entrepreneur's personal ideology and value, and include special assets that cannot be written into the balance sheet but can actually create value. These special assets cannot be cashed out , otherwise it means a significant loss of enterprise value. However, in some entrepreneurial processes, the entrepreneurs did not endow the company with much special value, so these projects need to be packaged for listing. According to the survey, the average life expectancy of Chinese private enterprises is two or three years, which is so short, which also shows the lack of uniqueness of corporate assets. To put it bluntly, there is still a lack of real innovative spirit.

Zhu Lin: Many companies are not mentally and physically ready for going public. It's like giving a million to a child and to an adult, the effect is definitely not the same.

China's stock market is still in the process of perfecting and maturing of rules, and the GEM, such as the delisting mechanism, is not perfect. At this time, do companies use supervision as a loophole to drill, or as a driving force to ask themselves? ?

There are many century-old companies in the United States that have gone through multiple economic cycles. Facts have proved that companies with internal control and self-discipline have stronger vitality. In China, companies have not experienced such a large economic cycle, and have not yet realized the importance of internal control and self-discipline to their own development. But companies on the GEM must take this step if they want to develop sustainably.

Wu Lidong: What needs to be added is that the benign mechanism of the capital market will generate an external pressure on enterprises, prompting enterprises to change their business methods and continuously create value. Otherwise, business operators will lose control over the business, and professional managers will also lose their positions.

Specifically, if the business is not well managed, investors will get information and will not buy its stock, which will lead to a drop in stock price. At this time, the control of the enterprise may be transferred. Because other companies may buy it. In addition, if the company faces too much operating pressure, the manager will be dismissed by the board of directors. This external governance pressure from the market will prompt operators to improve their business operations. However, the Chinese market still lacks such a benign mechanism.

The trap of over-raising - from no money to worrying about spending money

According to Wind statistics, as of October 24, 2011, the total amount of over-raised funds of 269 listed companies on the Growth Enterprise Market has reached 111.69 billion yuan. The research report of Ping An Securities also shows that at present, 84.66% of the over-raised funds of listed companies on the Growth Enterprise Market are idle in banks; the announced use plan also focuses on repaying bank loans and supplementing working capital. 51.42%; and some listed companies choose cash dividends.

From no money to worrying about spending money, GEM companies lack clear plans and effective channels for the use of over-raised funds, and some even blindly invest in real estate development, investment in PE, and loan sharks, leading to the wrong path of growth. How can listed companies manage their funds reasonably and let the money in their hands really play a role in their own growth?

Zhu Lin: The first problem a company encounters after going public is how to use the money raised. Although the prospectus will explain this, it is very sketchy, and frankly speaking, many of them are packaging of the underwriters, and the real idea of the company may not be as stated in the prospectus. Moreover, domestic securities companies take commissions. Of course, it is hoped that the more funds raised by the companies underwriting for listing, the better. However, we should see the negative effects brought about by the market's pursuit of enterprises. For many small businesses, having that much money in your pocket is not a good thing. Especially when the market is good, it is easy for businesses to get lost. When the market is not good, entrepreneurs should invest more cash for the infrastructure construction of the enterprise. In fact, it is very cheap to make such an investment at this time.

In any case, as an entrepreneur, you should be calm and understand that the market is always volatile, and the most important thing you should do is to do a good job in your physical business, instead of fluctuating with the market. For enterprises, to make good use of this capital requires a long-term strategic layout, rather than the pursuit of short-term economic interests.

Wu Lidong: Many companies have irregular operations because they know too much about the capital market, such as changing the investment direction of raised funds, not disclosing related party transactions, internal transactions, etc. These problems on the Growth Enterprise Market are related to the main board. Same problem in the market. We say that there is a "bad boy effect" in the capital market, that is, the abuse of affiliated transactions such as "large shareholders hollowing out listed companies" that often occurred in "state-owned" listed companies has also been learned by "private" listed companies. The GEM is also learning about the various fraudulent behaviors that occur on the main board, and one of the most important points is to change the investment direction of the raised funds.

In addition, it has a "legitimate violation", which is cash out. This is also what has been emphasized before that business operators regard the business as a money-making project rather than a career carrying entrepreneurial dreams. After the operation of the project, the investment can be recovered through listing, and the business requires long-term persistence and operation.

Furthermore, China lacks long-term investors, now more venture capital. The current system also determines that companies often take listing as the end point—from entrepreneurship to operation to recycling, and the end of recycling is listing. This also shows that there are too few attractive and good companies.

Dong Yi: Our company's fundraising and investment projects are based on scientific demonstration and feasibility studies, and are based on the company's market competitiveness, existing customer distribution and competitors, domestic and foreign market forecasts and corporate The company's raised funds are deposited in a special account decided by the board of directors for centralized management, and the raised funds are used in strict accordance with the relevant management system regulations and commitments to the capital market.

The Trap of Growth - Helps to Promote the "Prostration" After Listing

For Chinese private enterprises, listing for direct financing can expand the production scale of the enterprise, enhance the opportunities for market expansion, and realize the dream of becoming bigger and stronger. . However, behind the development impulse, it may also lose judgment due to the sudden increase in external pressure after listing, and deviate from the established development track in order to meet the needs of the market. In this way, the Growth Enterprise Market, which originally valued growth the most, has instead become a poor child in the A-share market, and its performance is lower than expected. Is it to grow by means of capital or to grow by creating its own value? How can we make listing truly become an important driving force for the growth of enterprises?

Zhu Junhong: The company definitely wants to promote itself to become bigger and achieve rapid development through listing. Running fast or running slowly depends on whether the leader of the enterprise is aggressive or conservative, and depends on the leader's ability to grasp the enterprise and the ability to control the team. If it is available, it is a good thing to run fast after listing; if it is not available, it will bring trouble to the enterprise.

Especially for an asset-light company like us, the development of the company comes from the ability of the team, and no one can do it for the company to expand. If the team can't keep up, I'd rather be slower. Of course, companies of different natures in different industries have different grasp of the speed of expansion, but the leader who understands the speed of enterprise development most clearly is the leader, so don't listen to others.

Zhu Lin: For high-tech companies, listing is really helpful, because such companies are growing rapidly and can use the abundant resources obtained by listing to seize many market opportunities or mergers and acquisitions. So for those light asset companies in China, the emergence of GEM is very good.

The company makes money after going public. However, more money is a responsibility, can the corporate team take such a responsibility? Businesses must have people who already have the experience and know how to spend such a large sum of money. Unless the business operators themselves are very good, they must have an open mind and accept those professional managers with good quality, and let them help you deal with such things. Otherwise, you may miss a lot of development opportunities or waste your money because of the psychology of a small company.

For the growth of an enterprise, there is always a gap between the expectations of shareholders and the actual development of the enterprise. Enterprises should not be swayed by the market. When the market bubbles are big, they should pay for it. When the market is not good, they should rush. These should be communicated and understood within the enterprise.

Dong Yi: The main purpose of our company's listing is to take advantage of the existing competitive advantages of the company and the power of the capital market to seize the historical development strategic opportunity that the rapid development of China's auto market has given us to become bigger and stronger, so as to achieve our success. The dream of becoming a world-class enterprise.

We didn't wait until we raised funds to develop. The plant we are currently implementing was started in 2010, and the equipment orders were signed before the listing. The local banks gave us enough credit loans. What we are looking for is our future growth and development space.

After listing, the cost structure, important customers, including some major events, should be announced regularly, so that enterprises can participate in market competition under the sun. Becoming a public company puts forward higher requirements for the improvement of our own management capabilities. We must always walk ahead of our competitors, avoid homogeneous competition, and ensure our competitive advantage with technological innovation and reliable quality, so that customers can buy products. Value for money, meets and exceeds its expectations. So, on the other hand, going public will urge us to continue to stay ahead and do better than ever.

Wu Lidong: Going public means giving up part of the ownership of the company. It used to be purely private or family-controlled, but now it has become a public company. Whether going public is the best shortcut for enterprise development depends on the nature of the enterprise. The special properties of some enterprise assets create value for the enterprise, but cannot be recognized by the market. If this part of special assets is very high, the company will be discounted if listed, because the listing does not include this part of special assets, then the company may choose not to list. However, for those companies with high asset versatility, listing will be a better choice.

Actually, if there is no constraint of financing difficulties, listing is not an inevitable choice for private enterprises, but there are not many other choices for enterprises now, and listing on the ChiNext at least solves the capital problem.

The Trap of Governance - Lack of Governance Awareness Leads to Risks in Management The city closed on June 30, 2010, the average score of the top 100 companies by market capitalization in terms of governance was 63.01 points, barely reaching the passing line. Among them, the average score of the two indicators of information disclosure and equal treatment of shareholders exceeds 70 points, but in terms of the responsibility of directors and boards of supervisors, none of the top 100 companies have reached the pass line, with an average score of only 57.3 points and 51.8 points, respectively.

Corporate governance is the foundation of a listed company, and the level of corporate governance fundamentally determines the quality and development capability of a listed company. The level of corporate governance of the top 100 companies in China's stock market is still the same, and the problem of small and medium-sized enterprises on the ChiNext may be more serious.

Wu Lidong: Whether listing can improve the management level of the enterprise depends on the purpose of the enterprise operator to go public. If it is just to make money, it can only be said to be useless; if you want to become a century-old store, you will gradually improve it according to the requirements and standards put forward by the market, and then may transition to the main board market to meet the needs of various external stakeholders. expectations for it. Therefore, this has higher requirements for the internal management level, business model and operation mechanism of the enterprise.

In addition, institutional investors in my country's capital market have not yet achieved the expected development goals. Institutional investors, represented by funds, value the value investment of enterprises more than small and medium investors, and the former may help the capital market to form a benign mechanism. The market transition from speculation to true value investing will also create an external check and balance pressure on companies.

Zhu Lin: After listing, many companies still think of a private company in the way of doing things. Sometimes it is not because of inadequate supervision or intentional information disclosure, but a cultural difference that can only be understood after experience. Therefore, enterprises should introduce more experienced and high-end professional managers. Going public is like a magnifying glass. Someone needs to help entrepreneurs to improve internal governance and maintain smooth communication with the outside world through the IR (Investor Relations) department. This is actually a challenge faced by global listed companies.

In particular, it should be pointed out that many domestic SME operators have poor financial sensitivity, especially the underwriters will clean up the previous financial affairs in order to allow the company to go public, but this does not mean that the company is in this regard. There is a good feeling that once the listing, there is no pressure, there may be problems in compliance with financial standards. Moreover, a big difference between a company's domestic and foreign listing is that the CFO plays the leading role in the latter's listing roadshow, because institutional investors will ask many financial questions, while the former does not need a CFO, and at most is an auditor from the perspective of auditing. The role of the financial controller.

Zhu Junhong: Now that the supervision is so strict, there are only a few listed companies that are not regulated. Just like our company, now small shareholders will call to inquire about the situation. Moreover, our major shareholders have never been involved in the operation, but there is a set of requirements for operation and management, so we are not unfamiliar with the supervision after listing, but it feels a little stricter. It is still more important to choose an investor in the early stage of development of a company. Shareholders, the board of directors, and the management all know their own positioning. Along the way, the changes before and after the company's listing will not be too big.

Zhu Lin: What I want to emphasize is that after listing, for many people, personal interests have ended, and many times it is indeed a sense of responsibility. China's stock market is dominated by retail investors, with relatively poor risk tolerance. Enterprises and business operators should have a sense of social responsibility, self-discipline, and do their own corporate governance with a responsible attitude, and do not mislead investors. After all, this is a common market for everyone. If the market environment is poor, it will also have a blow to the development of the company itself.