An interesting thing happened during the construction of the Guangzhou IFC Mall in Guangzhou, a metropolis in southern China.
What started as an attempt by the president of a typical local company Using funds from a public company he founded to back projects sparked a shareholder revolt. But when, instead of ignoring shareholders, the company’s chairman actually listened, things took a strange and unexpected turn.
This particular story involves Jiumaojiu International (OTCPK: JIUMF, 9922.HK), the operator of the popular Tai Er restaurant chain known for its specialty ‘sauerkraut fish’. But the story, at least for the first part, could apply to any of the hundreds of publicly traded Chinese companies whose founders are often also controlling shareholders.
Such founders often treat their companies like personal fiefdoms and are willing to personally benefit, even if such actions offer little or no benefit to minority shareholders. We may use a company to do so. This particular characteristic is a major reason why offshore-listed Chinese companies are viewed with suspicion by stock buyers who inherently recognize that they are giving up their right to influence management when investing. is.
But this latest story suggests that perhaps at least some founders are starting to realize that this kind of practice is unacceptable and irresponsible to the shareholders they’re supposed to serve. As Jiumaojiu founder and chairman Guan Yihong quickly realized, it can also come at a cost.
The story started last week when Jiumaojiu announced it would pay up to 1 billion yuan ($140 million) to 26% of the company developing the Guangzhou IFC mall project in its hometown of Guangzhou. The company explained plans to move its headquarters to the complex, noting that it will need to maintain its reputation as a cutting-edge, trendy restaurateur.
But investors didn’t see it that way. They expressed their displeasure by selling Jiumaojiu shares the next day, resulting in a 20% drop in the stock price of his. This equates to a loss of about HK$4.6 billion ($586 million) in the company’s market capitalization, and $240 million as Guan owns his 41% stake in Jiumaojiu. caused a personal loss of Both numbers far exceed his proposed $140 million investment.
Perhaps the personal loss was the reason Guan thought twice about the decision.
For whatever reason, the company quickly made another announcement earlier this week, saying it had changed its mind and would not invest in the project. said it would invest in Unsurprisingly, Jiumaojiu’s stock price rose after his second announcement, regaining most of the position it lost after the first sale.
To understand what was probably going on here, we need to recognize that good government relations are very important for successful business in China. As Jiumaojiu is based in Guangzhou, we rely on the local government for all kinds of support, from obtaining the necessary permits to obtaining support from the local tax office, to ensure our operations run smoothly. .
At the same time, China’s private property market is currently experiencing the worst recession in its short history. The recession hit housing development the hardest, with many projects stalling mid-development due to lack of funding.
The status of the Guangzhou IFC mall project, which is still under construction and scheduled to be completed in 2026, is unknown. As the president of a well-funded local conglomerate, Guan may have personally felt that he could support the project by providing company funding, and such a move was “suggested” by local authorities. may even have been.
Ultimately, Guan’s actions cannot be fully blamed. This was probably a major government-related exercise for the benefit of both Kuumajiu and himself. It looks very irresponsible in the current situation we are facing.
Hopefully, the heads of other Chinese companies will take note of this example and think twice about using public company funds to make similar questionable investment decisions. As Jiumaojiu’s case shows, such decisions can harm not only the company, but also the personal assets of the company’s founders.
Editor’s Note: The summary bullet points for this article were selected by the Seeking Alpha editors.