It’s been a big year for Chinese companies raising money from IPOs and many foreign investors have done well. Yet China has been a mixed bag when it comes to governance among companies that list abroad. Notable problems in recent years include Luckin Coffee, Sino Forest, Longwei Petroleum, China Media Express and Puda Coal.
What’s a lesson for the here and now? Foreign investors are that buying China shares should be on the lookout for governance depth.
So says Steve Foo, a Fellow CPA and self-described “turnaround professional” who has more than two dozen years of financial management experience in Asia. The Singapore native and former venture capitalist is currently based in China; he’s served on the board of SOS Health Rescue Services (formerly known as China Rapid Finance) and Hebron Technology. Earlier, he was an investment analyst at Deutsche Bank Alex Brown, chief operating officer at Legg Mason Asset Management (Asia), the Asia Pacific CFO at London Asia Capital, and director of Asia Pacific for International Alliance Associates.
How did Foo become a turnaround guy? “I was seconded by my own venture capital arm to be a CFO in a few of the worst performing companies among the entire portfolio,” Foo recalled in an interview on the sideline of the Forbes China Innovation Summit held Oct. 29-30 in the southwestern China city of Chengdu.
Does being a turnaround guy mean Foo “mostly gets involved with companies on death’s door?” I asked. “You’re right,” he said. “Either companies have problems going public – including being hammered out by the regulators in the U.S. or, after being public, they get hammered down by either their exchanges, regulators or investors that start losing confidence in them,” Foo said. Listees may then talk to Foo about how to “go in and carry an umbrella. I either stay on the board or maybe, as a CFO, just hold up the fort while trying to be a partner.”
Loose liquidity around the world amid the COVID-19 pandemic has helped to create a favorable environment for new listings and stocks globally. China’s economic outperformance has made its shares particularly attractive for some.
Yet many investors don’t pay enough attention to details. “Most investors carry a herd mentality, meaning that they read white papers and have limited due diligence because they don’t have their own due diligence teams. They send in outsourced due diligence providers, and they call it trust,” Foo said. “Then, sometimes, they find themselves, what we call ‘stuck,’ carrying the baby or the project after being invested in — very common. And it has become more pronounced in this pandemic, because there are just too many what we call ‘skeletons in the closet.’”
“Chinese standards are very different from what you and I know that we grew up in the West. Everything is okay, unless something is really wrong,” he said.
Today’s fundraising environment makes it relatively easy for companies beyond series C that want to list to hire a CFO to help the business look attractive during an IPO process, Foo said. “Fundraising is such smooth sailing (that) they can basically go to a headhunter to pick any CFO — any face they like.”
Afterward, “very tricky situations” may emerge after talent leaves, Foo said. “Chinese entrepreneurs and Asian entrepreneurs in general tend to trust all these providers so much that their own internal management team — and the whole team that takes care of this fundraising IPO — is weak. As a result, they tend to get hammered” by investors and others, he said.
“Firefighters like myself might be able to help, provided that the company is not in what we call ‘late stage cancer.’” Foo tries to train a team to take care of legal affairs, finance, and capital markets.
“If we train the whole team, together with ample time — just like traditional Chinese medicine, there’s enough time to work through what we call a “little flu,” before it develops and a company ends up getting cited by the likes of Muddy Waters, Foo said.
The Forbes China Innovation Summit was organized by Forbes China, the Chinese-language edition of Forbes, and the Chengdu Municipal Government. The event attracted 300 attendees and highlighted breakthroughs in innovation strategies involving new technologies such as 5G and blockchain, as well as autonomous vehicles.
Speakers include executives from Forbes China’s annual list of “50 Most Innovative Companies” unveiled in June, as well as members of an annual “Up and Comers” list that highlights publicly traded small and medium-sized businesses. Attending companies include Hundsun, WeBank, LONGi Green Energy Technology, Guangdong Aofei Data Technology, Inspur Group, AK Medical Holdings and Hangzhou Qulian Technology.
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