Delisting of Chinese firms cause 'China phobia' among investors.
The Korea Exchange (KRX), the country's bourse operator, said it would delist Chinese tile company Wanli from the junior Kosdaq market, May 23. As a result, the company's share price dropped 71.3 percent to 128 won, Friday, causing huge losses for small investors who hold a 57.88 percent stake in Wanli.
The company was listed on the bourse in June 2011, but it faced a suspension of trading last year following an auditor's disclaimer opinion for its 2016 financial report. It barely escaped delisting by appointing another auditor and resumed trading last December but it ended up being targeted for delisting as the same thing happened for its 2017 report.
Wanli will be the 10th Chinese company to get delisted from the Korean bourse. Starting with 3Nod Digital which debuted on the bourse in 2007, six Chinese companies, including China Ocean Resources, China Food Packaging, United Tech, Cowell Holdings and Huafeng Textile, listed here before 2010. They entered the bourse as the government and the KRX actively sought foreign companies for "globalization of the capital market."
However, all of them ended up being delisted. China Gaoxian Fiber Fabric Holdings, Shenglong PV-TECH Investment, and Wayport, which listed later, were also delisted following disclaimer opinions.
Among the 23 Chinese firms that debuted on the bourse, only 13 remain, all on the junior Kosdaq. However, the number may drop further. China Hao Ran, a paper recycling company, was suspended from trading at the end of January as its subsidiary delayed filing the fact that 16 out of its 17 waste paper collection centers had halted operations. It will take some time for the KRX to decide its fate. Most of those remaining on the bourse are also traded at prices far lower than their initial public offering.
Analysts point out that the delisting is triggering "China phobia" among investors.
At the Cheong Wa Dae bulletin board, an angry investor urged the administration to take measures to prevent further damage to small investors.
"The KRX and brokerages continue listing Chinese firms, but small investors are sustaining all the losses. They are irresponsibly listing problematic companies without protective measures for investors," he wrote.
The posting followed the delisting of China Ocean Resources. The deep sea fishing company which debuted on the KOSPI in May 2009 once soared to 12,000 won, four times its initial public offering price, amid expectations over increasing fish in Chinese diets. However, it faced an auditor's disclaimer opinion on top of trading suspension due to a fraudulent corporate filing. Investors also suspected the company of fabricating photos on its website to inflate the number of ships it had. As the company had no office in Seoul, investors could only get information through corporate filings or the website.
Analysts point out that the Chinese companies were a blind spot in regulation despite being listed on the bourse.
"Some businesses that didn't meet conditions for listing in China chose Korea as an alternative. They involved risk from the beginning," an analyst said.
To increase the number of foreign firms, Korea lowered barriers too much. Lead managers also lacked information to screen them out.
"The brokerages leading the listing should have properly evaluated their soundness with due diligence and analysis, but they lacked such experience in the beginning," said Korea Capital Market Institute research fellow Hwang Sei-woon.
Chinese firms also seem to be less interested in the Seoul bourses. Previously, they considered the relatively short time needed for listing, higher evaluation and possible collaboration with Korean companies with advanced technologies as merits of listing here. Six Chinese companies debuted here in 2016 but there was only one IPO in 2017. A Chinese food company which was preparing for listing withdrew from preliminary screening recently. According to the KRX, there is no Chinese company currently going through preliminary screening, despite the lessening of tension between two countries over the deployment of the U.S. Terminal High Altitude Area Defense (THAAD) missile defense system here.
Some analysts say that delisting of problematic companies will help healthy ones get a fair valuation.
"As investors lost trust in Chinese firms due to such issues, second-generation Chinese companies that listed on the bourse relatively recently are likely to make efforts for more transparency and better communication with investors," said Park Jong-sun, an analyst at Eugene Investment and Securities.
"Though it will take time for them to regain investors' trust, those who succeed in doing so will get a fair evaluation and may even get a China premium based on the huge Chinese market."
The KRX also plans to focus on qualitative growth than quantitative growth in the listing of foreign companies.
"We will continue making efforts to attract foreign companies to list their shares here," said KRX Chairman and CEO Jung Ji-won, in a recent meeting with reporters.
"When considering the companies that caused problems recently, however, finding healthy companies seems to be as crucial as attracting more firms to the Seoul bourse," he added.