Losing Investor’s Confidence
China Ocean Resources was forced to be virtually delisted from the Seoul bourse as the company received a disclaimer of opinion even in a re-audit report.
As the delisting of Chinese companies was repeated, the Korea Exchange suddenly switched to a prudent mode about listing Chinese companies. The Korea Exchange requested Korean investment banks (IBs) to pay special attention to the listing of Chinese companies. It is said that the Korea Exchange made it clear that Korean securities firms that conducted due diligence for listing Chinese companies have certain responsibility for the listing of insolvent Chinese companies and demanded that they veer away from concentration on Chinese companies.
According to the IB industry on August 8, the Korea Exchange recently held a meeting with major IB stakeholders and asked them to postpone the listing of Chinese companies or to become prudent. "Maintaining the listing of Chinese companies as it is now may cause more problems," said an official at the Korea Exchange. “It is clear that supervising authorities are also reluctant to deal with Chinese companies."
"We are coordinating listing times for Chinese companies as directly requested by the exchange," an IB official said. "This issue cannot be addressed by toughening listing examinations. Thus, it will be difficult for Chinese companies to be listed on the stock market for the time being.
To Korean IBs and the exchange, Chinese companies are the main targets in listing foreign companies. As six of seven listed foreign companies were Chinese last year, the exchange’s brake on the listing of Chinese companies suggests much. This means that the exchange judged that it is better to insure substantiality even if the exchange suffers damage to its performance.
"Investment sentiment about listed Chinese companies already hit the bottom," said a representative of the IB industry. "Listed Chinese companies can hardly restore investors’ confidence in them even if they employ pro-shareholder policies and pay dividends."
If China Ocean Resources listed in 2009 is delisted, the KOSPI stock market will be devoid of Chinese companies. After the Gosom Incident where the trade of its stocks was suspended due to accounting problems in 2011, Uniphone Telecommunication and Shenglong PV-TECH Investment were listed on the Korean stock market. But they were delisted after disclaimers of opinions and investors lost hundreds of billions of won. If China Ocean Resources is delisted, only 13 Chinese companies will stay listed among 22 Chinese companies which have been listed since a Chinese company was listed on the Korean market for the first time in 2007. Only 59% survived in the Korean stock market. Sinophobia gave rise to insufficient subscription for newly listed stocks of Chinese cosmetics raw material company Coloray.
Mirae Asset Daewoo (formerly Daewoo Securities) was the lead manager for four Chinese companies with accounting problems among Chinese companies completely delisted. China Ocean Resources was listed on the Korean stock market with KB Securities as its lead manager. The exchange requested securities firms to be more prudent about listing Chinese companies because the exchange is concerned that the delisting of Chinese companies may undermine the credibility of Korean securities firms.
However, it is pointed out that the exchange’s prudence mode about Chinese IPOs may weaken IBs’ business activities. "It is true that Korean IBs were poor at checking foreign companies as they are not subject to Korean laws’ control and management. But it is not right to consider the listing of Chinese companies itself negative,” said Hwang Se-woon, the head of the Korea Capital Market Institute. “We have to acknowledge that Korean IBs now have stronger competitiveness as they have enhanced their capabilities and networks by using past experience as a lesson.”