Published 26th January, 2017 17:00 HKT (09:00 GMT)
Jilin Jiutai Rural and Commercial Bank (stock code 6122) raised a HK$2.55 billion in an IPO, with shares debuting on the Hong Kong Stock Exchange on 12th January 2017. However what Jilin Bank’s IPO prospectus did not fully disclose, and what mainstream media did not investigate, is that two of the bank’s major ultimate beneficiary owners are Jilin province politicians.
According to the prospectus, the substantial shareholders immediately following the offering are as follows:
- Jilin Province Trust Co., Ltd. 10.01%
- Changchun Huaxing Construction Co., Ltd. 8.42%
- Changchun Huamei Tourism and Culture Media Co., Ltd. 4.55%
- Cornerstone investor – China Create Capital Limited 2.82%
- Cornerstone investor – Suhang Investment Holdings Limited 2.57%
Researching these corporate names reveals the following government interests:
1. Jilin Trust is 97.5% owned by the Jilin province Department of Finance, a shareholding relationship which was disclosed in the IPO prospectus.
2. Huaxing Construction is 60% owned by Zhang Yusheng, a non-executive director of the bank, also disclosed in the prospectus. However searches in Chinese media and local government websites show that Zhang is also a member of the Changchun Municipality People’s Congress, and according to one report, “repeatedly rated as an outstanding party member”. To note, Changchun is the capital of Jilin province, and home to Jilin Bank’s headquarters. People’s congresses established in the provinces operate directly under the central government, and have power over local economic development and budgets for their respective administrative areas.
3. Huamei Tourism is 92.2% owned by Jilin Jiuying Investment Management Group Co., Ltd., and that according to the prospectus, a “trust scheme managed by Bohai International Trust Co., Ltd.”, owns 66.7% of Jiuying Investment. It is unclear who is the ultimate beneficiary here, but Jiuying Investment’s 2015 corporate filings (the latest available in the companies registry) show its 66.7% stake was subscribed to by Jilin Province Trust on 2 November 2015. According to the same filings, 22.3% of Jiuying Investment is held by Jilin Province Jiapeng Group (formerly known as Jilin Province Jiapeng Road Construction Co., Ltd.). Company filings show Jiapeng Group has many small shareholders, but only one substantial shareholder named Wang Zhishan, who owns 50.03%. Searches in Chinese media and local government websites reveal that Wang is also a member of the Twelfth Jilin Provincial People’s Congress. According to Jilin Bank’s prospectus, Jiapeng Group had a 6.48% shareholding in 2013, but this was reduced to 2.53% by end of June 2016, presumably to avoid appearing on the substantial shareholders list. The prospectus mentions Wang only once, as a non-executive director who resigned on 2 April 2015. Wang no longer appears on company records.
4. Cornerstone investor China Create Capital is incorporated in the British Virgin Islands and wholly owned by Zhang Wei. Only limited information on the investor can be found in searches of English and Chinese media. According to the prospectus, Create Capital ‘may’ enter into a loan agreement with an entity ultimately owned by state controlled China Construction Bank, using the Jilin Bank shares as collateral. The prospectus specifically mentions that in the event of loan default, CCB could take charge over these Jilin shares. To note, CCB is also one of the book runners for the transaction, in what appears to be a reciprocal business arrangement. In the absence of information on Create Capital in the public domain, it might be construed that this entity is an investment vehicle dependent on, or used by CCB, to prop up the share offering.
5. Suhang is incorporated in the British Virgin Islands and is ultimately owned by China Huarong Asset Management Co., Ltd., whose principal business is in distressed asset management, and whose controlling shareholder is the Ministry of Finance.
Here is a recap, and the main shareholders list based on ultimate beneficiary owner:
- Jilin province Department of Finance 12.56%
- Jilin province politicians 6.83%
- Cornerstone investor 1 – Mystery investor supported by Chinese state bank 2.82%
- Cornerstone investor 2 – Distressed asset manager controlled by China’s Ministry of Finance 2.57%
After ‘translating’ the list into ultimate beneficial owners, the financial institution looks a lot less market oriented.
The trust companies need the rural bank’s branch network to sell wealth managements products, and the local governments need trust companies to help fund local construction, or in this example, Jilin Trust – Jilin Bank – Huaxing Construction & Jiapeng Group.
The lack of full disclosure in Jilin Bank’s IPO prospectus on its ultimate beneficiaries, and the uncertainty surrounding the role of Jiapeng Group and its owner Wang, should be concerns for any Jilin Bank investors. And with such a tightly connected group of politicians, bankers, and entrepreneurs, the opportunities for collusive corruption can exist.
The arrangement contains too many risks to list in one article, the purpose of which is to highlight why performing due diligence should be on any investors checklist when investing in Chinese stocks.
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N.B. The author has no long/short position in the stock.
In Marginal Revolution’s assorted links 26th January, 2017.