Jiumaojiu’s proposed $140 million real estate investment, which it quickly scrapped after an investor revolt, reflects how Chinese corporate chiefs often treat their companies as personal fiefdoms

 

By Doug Young

A funny thing happened on the way to construction of one of China’s newest mega-commercial complexes, the Guangzhou IFC Mall in the southern mega-city of Guangzhou.

What started as a typical local corporate chief’s attempt to support the project – using money from the publicly traded company he founded – resulted in a shareholder revolt. But then things took a strange and unexpected turn when, instead of ignoring his shareholders, the chairman of the company actually listened.

This particular tale involves Jiumaojiu International (9922.HK), operator of the popular Tai Er restaurant chain known for its specialty “sauerkraut fish.” But the story – at least the first part of it – could really apply to any of the hundreds of publicly listed Chinese firms whose founders are often also their controlling shareholders.

Such founders frequently treat their companies like personal fiefdoms, sometimes using them to do things that benefit them personally, even if such actions have little or no benefit to their minority shareholders. This particular trait is a big reason why offshore-listed Chinese companies are viewed with suspicion by stock buyers, who essentially realize they are giving up their right to influence management when they invest.

But this latest story shows that perhaps at least some company founders are beginning to realize this kind of practice is unacceptable and irresponsible to the shareholders they are supposed to be serving. It can also be costly, as Jiumaojiu founder and Chairman Guan Yihong quickly discovered.

The story began last week when Jiumaojiu announced it would pay up to 1 billion yuan ($140 million) for 26% of the company developing the Guangzhou IFC Mall project in its hometown of Guangzhou. The company explained it planned to move its headquarters into the complex, pointing out it was necessary to maintain its reputation as a leading-edge and trendy restaurant operator.

But investors didn’t quite see it that way. They expressed their displeasure by selling off Jiumaojiu shares the next day, resulting in a 20% tumble for the stock. That translated to a loss of about HK$4.6 billion ($586 million) in the company’s market value, and a $240 million personal loss for Guan due to his ownership of 41% of Jiumaojiu’s stock. Both figures were far more than the size of the proposed $140 million investment.

Perhaps the personal loss was what made Guan think twice about the decision.

Whatever the reason, the company quickly put out another announcement earlier this week, saying it had changed its mind and would no longer invest in the project. Instead, it said, Guan would make the investment personally using some of his other assets. Not surprisingly, Jiumaojiu’s shares rallied after the second announcement and have now gained back most of the ground they lost after the initial selloff.

To understand what was probably happening here, one needs to realize the huge importance of good government relations to doing successful business in China. Jiumaojiu is based in Guangzhou and thus relies on the local government for all kinds of support – from obtaining necessary permits, to getting support from the local tax office – to make sure its operations run smoothly.

At the same time, China’s private property market is currently undergoing the worst downturn in its brief history. That downturn has caused many projects to stall midway through development due to lack of funds, with residential developments taking the biggest hit.

We don’t know the status of the Guangzhou IFC Mall project, which is still under construction and set for completion in 2026. But it’s probably not unreasonable to guess it might have faced financial difficulties in the current climate. As the head of a major local corporation with plenty of cash, Guan may have personally felt he could help the project by offering his company’s funds, and such a move may have even been “suggested” by local authorities.

At the end of the day, we can’t completely blame Guan for his actions, which were probably a major government relations exercise for the benefit of both Jiumaojiu and himself personally. But his use of Jiumaojiu’s funds for the exercise looks highly irresponsible, especially in the current climate when the company is facing its own business slowdown.

Hopefully other Chinese corporate chiefs will take note of this example and think twice about using their publicly traded companies’ money to make similar dubious investment decisions. As Jiumaojiu’s case shows, such decisions could be harmful not only to the company, but also to the company founder’s personal wealth.

Doug Young is Bamboo Works’ editor in chief. Contact him at dougyoung@thebambooworks.com

(In the event of any conflict between the English and Chinese versions of this blog, the English version should be the reference.)

This commentary is the views of the writer and does not necessarily reflect the views of Bamboo Works

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