Chinese companies- cheap for a good reason?

In 2009, one of my clients was introduced to a Chinese stock listed on the Hong Kong Stock Exchange (HKEX), called China Zhongwang. This company was "the third largest aluminium extrusion product developer and manufacturer in the world and the biggest one in Asia and China, primarily focusing on, among others, the light-weight development of transportation, machinery equipment and electric power engineering sectors" (as per a report in Wikipedia). He bought into this stock at HK$8.00 apiece. In early 2010, the stock was suspended for a few weeks due to inaccurate information provided in its prospectus. I did not follow this stock in the past few months but I remember that the inaccurate information was never fully resolved and as a result the stock keeps sliding until it is now trading at only HK$3.10 apiece. Financial irregularities were also witnessed among Chinese stocks listed on the Singapore Stock Exchange (SGX) (here & here).


Chart 1: China Zhongwang's daily chart as at June 13, 2011 (Source: Yahoo Finance)

In the past few days, we can read a lot about similar irregularities among the Chinese companies that are listed in the U.S. stock markets. You can read more about it here & here. The problem has become so acute that it has affected even bigger names, such as Baidu (Code: BIDU). You can see from the chart below Baidu has dropped to its accelerated uptrend line (S1-S1) at USD120. If this support failed & the 200-day SMA line at USD117 also failed, Baidu could slide to the psychological USD100 level or even the long-term uptrend line support at USD80. Indicators are bearish, with negative crossover recorded in the MACD & ADX indicators while RSI is hovering at the 50 mark.


Chart 2: Baidu's weekly chart as at June 10, 2011 (Source: Stockcharts)

I am also puzzled why Chinese companies would want to list in Malaysia. The negative factors are as follows:

1) As a promoter, you would get less for the shares that you are selling in the case of an Offer for Sale. Would you go and sell your car in Kuala Lipis instead of Kuala Lumpur, especially when it would fetch a lower price?

2) As the owner of the listed company, you want to be able to raise capital at competitive rate. This means that you want to issue shares at high prices because the higher the issue price, the lower is the cost of capital. You won't get that by listing the company in Malaysia as the stock would only command a PE multiple of 3-4 times.

3) Finally, you won't get any bragging right as the owner of a company listed on Bursa Malaysia. Maslow theory says that the second highest needs in human's hierarchy of needs are esteem needs, which include recognition by your peers. Imagine a tycoon being toasted at the annual CNY dinner. He would want to be known as someone whose company is listed on the Shanghai Stock Exchange (SSE) or better still on New York Stock Exchange (NYSE). If not the SSE or NYSE, then at least HKEX. He would still get a polite clapping if his company is listed on the SGX, but he would get a puzzled look all round if it is listed on Bursa Malaysia. Malaysia to a Chinese is like Myanmar is to a Malaysian.

Based on the above, I can only conclude that those Chinese companies listed in Malaysia must have some serious shortcomings, such as inability to meet listing criteria, which preclude them from listing on other exchanges. My hope is that they are still decent companies and not someone's get-rich-quick Trojan horse. I believe I am not alone in holding this view, which may explain why Chinese companies listed on Bursa Malaysia are trading at such low PE multiple.