Houston Community News >> Unveiling the Mystery of U.S. Listed Chinese Companies
10/3/2006 Houston (Marketwire)--The bridging of China's profitable businesses with the world's most advanced capital markets is a reflection of the risks and rewards of today's global economy. Without a Chinese background and active participation in modern China's business activities, it is easy to misunderstand China's unique culture and its companies. With almost 20 million registered businesses and a large and rapidly growing economy, China represents a significant growth opportunity to international investors. It is important to understand the business environment and market forces at work.
The bridging of China's profitable businesses with the world's most advanced capital markets is a reflection of the risks and rewards of today's global economy. Without a Chinese background and active participation in modern China's business activities, it is easy to misunderstand China's unique culture and its companies. With almost 20 million registered businesses and a large and rapidly growing economy, China represents a significant growth opportunity to international investors. It is important to understand the business environment and market forces at work.
Chinese companies in the U.S. follow U.S. rules and regulations
There are currently 149 China-based companies that are publicly traded in the U.S. (excluding pink sheets). Of which, 64 are traded on national stock exchanges (NASDAQ -- most; NYSE, AMEX -- least), a very small percentage of the more than 10,000 public companies in the U.S. Many of these Chinese companies have gone through full SEC reviews with U.S. GAAP audited financials. Those companies that become listed via reverse mergers eventually are reviewed by the SEC when they register shares sold via subsequent financing. These companies offer global investors an opportunity to participate in China's entrepreneurial spirit and economic prosperity while having their public filings current with the SEC and readily available.
What attracts Chinese companies to America?
The majority of the approximately 1,380 companies on China's two stock exchanges are State Owned Enterprises (SOEs). However, 65% of the Chinese economy is driven by high growth small and medium-sized enterprises in the private sector, part of which Wall Street terms the "middle market." Private ownership of businesses and assets is not only legal but also protected and strongly encouraged by the Chinese government because the thriving private sector provides the majority of jobs in China. Chinese domestic listings are virtually impossible for middle market companies due to an approximately three-year waiting period as a result of the thousands of listing candidates waiting in the pipeline. Global markets in Hong Kong, the U.S. and the U.K. have become viable alternatives with Hong Kong taking the No. 1 spot. Recently, private sector Chinese companies such as Mindray Medical, Suntech Power, and New Oriental Education and Technology have found enormous successes for themselves and for their investors by listing in the U.S.
The U.S. economy is built upon the principle of a free market, including the free flow of capital, people and businesses. Our well-regulated capital markets managed by serious and professional regulators efficiently serve a free market economy which is the envy of the world.
The "mystery" of reverse merger vs. an IPO
When a company goes public via a reverse merger and completes an equity financing, investors typically require the company to register such new shares with the SEC by filing a form SB-2 (for a small business issuer as an example), which is the same type of document used for a traditional IPO. Before such a filing can be declared effective, the company must satisfy all SEC comments, if any. The following illustrates the two common approaches of a public listing and the steps involved:
A Reverse Merger: Reverse Merger (guaranteed public company status) -- Capital Raise (a PIPE or other means at an agreed price) -- SB-2 Filing and Full SEC Review.
An IPO: SB-2 Filing and Full SEC Review -- IPO (subject to market conditions) -- Capital Raise (at an agreed price).
In both cases, due diligence, disclosure and corporate governance are required, and healthy companies do get noticed by investors over the long run. What counts is fundamental financial performance; not country of origin or the path in which a company becomes public. For every failed reverse merger, there are countless companies that have failed after having completed traditional IPOs. Selectivity and due diligence abilities on the part of the intermediaries -- whether they are bulge bracket or niche focused -- are critically important.
Cultural misunderstanding creates complexities
Bodisen Biotech, Inc (AMEX: BBC), a China-based organic fertilizer company was ranked by Forbes China as the 16th fastest growing company in China (January 2006). The definition of "organic" varies from country to country. The Chinese government defines "organic" fertilizers as those that do not produce crops which contain harmful chemicals. The U.S. standard however defines "organic" as the source of the fertilizer raw materials. It is certainly appropriate and correct to call Chinese government-certified fertilizer products "organic" fertilizers in a local Chinese market. This is a typical example of cultural misunderstanding encountered in global trade.
Another example: Why is the English word "Biotech" widely used in the names of Chinese companies? The Chinese word for "biotech" is "sheng wu," which has a very broad meaning: "living things." In China, all kinds of industries, including government agencies, widely adopt the word "sheng wu" or the translated English word "biotech" in their names to reflect a business that produces or services any "living things." Even a specialty pet food store or a water treatment plant in China may call itself "biotech" in Chinese. As a reflection of its language and culture, it is certainly correct for tens of thousands of Chinese companies to include the word "biotech" in their corporate names. "Sheng wu" is a broadly defined term in Chinese while the English word "biotech" has a much narrower meaning. The accurate translation for the Chinese word "sheng wu" is indeed the English word "biotech."
A multi-cultural global environment involves many complexities. Narrow-mindedly assuming Chinese companies may not have appropriate corporate names or patents for their technologies is the wrong way to try to understand a foreign culture with 5000 years of history. It is important not to draw conclusions or speculate wildly without possessing some basic knowledge on China.
English vs. Chinese
Embarrassing and ignorant comments such as "If a company's shares trade in the U.S., shouldn't its executives be able to read and write English?" are just plain dumb. China has the highest English literacy rate in the world among non-English speaking countries. Chinese kids are required to have English language as a mandatory course from elementary school all the way to graduate school. That's over 10 years of English language study in a Chinese kid's life. How many of those 1,815 ADRs publicly listed in the US have all of their executives speaking perfect English? And how many successful US CEOs or commentators on China speak any Chinese at all? Let's be fair: What makes America strong is our openness which invites all cultures. Cultural sensitivity is critically important to the longevity and prosperity of our US economy. Yes, taking a 13-hour flight to China will certainly help gaining a real and balanced perfective on China.
China is a growing global economic power and it should not be ignored
As a Chinese American fluent in two languages and as a China expert who is actively involved in China-related businesses in the last two decades, I have witnessed the transformation of China from a backward centrally planned economy to a gradually market driven economy largely due to successes in its private sector. After more than 25 years of economic development and robust growth, China's economic power and its thriving private enterprises are here to stay for a very long time. It is good to engage China and learn from each other.
The American Way
That a business conducts its operations outside of the U.S. should not make it innately disreputable or questionable. Success is dependent on management's ability to create value for its shareholders. It is a company's earnings and prospects that should eventually count, not its country of origin. Fast growing Chinese companies may offer investors the same if not greater opportunities than those companies in mature markets.
It pays to be open minded. Isn't that what America is about? What makes America strong and makes me a proud Chinese American is the trust in the integrity of our capital markets and belief in our democracy. However, what makes America remain strong for years to come in a highly competitive world is our ability to continue to accept new things and not have prejudice against them no matter where they have come from, China or elsewhere.
In the end, America is a land of opportunities supported by many generations of naturalized US citizens like myself and millions of other fellow American who have willingly changed our native names to be better identified with the English language-based mainstream American culture. The American life is a learning experience for everyone. We are all part of this great American "melting pot," fair and equal for every member of our democratic society.
Yes, I am Benjamin Wey, a bilingual expert bridging US and China with almost two decades of China expertise. As a leader of Chinese American business community on Wall Street, I am proud of my Chinese heritage and I am very proud of my citizenship as an American. The ability to bridge US and China requires an open mind. For all of us, please allow entrepreneurship and free market economy an opportunity to win and compete freely without prejudice in this great land of freedom called America.
(Contributed by Benjamin Wey)