CEO of EKAI Capital, Wang Ran (left), and Director General of Legend Investment, Liu Erhai (right), were guests on Sina.com.
Sina Technology News: On the morning of July 1st, in the past few months, financial fraud and contractual controlling have cast a shadow over Chinese concept stocks. Is it because China's Internet is too restless or Wall Street too greedy? When the CEO of EKAI Capital, Wang Ran, and Director General of Legend Investment, Liu Erhai, were guests on a Sina interview, they pointed out that financial fraud was just an individual phenomenon, but the valuation of Chinese concept stocks was indeed too high. Under uncertain conditions which are not yet clear, the window for going public in the US has been closed by half.
High Valuation Leads to Overall Decline
Wang Ran pointed out that this time, there was a collective decline in Chinese concept stocks. The basic reason was that in the stock market for a period of time, some Chinese concept stocks indeed had inflated valuations. Therefore, the market would certainly find an opportunity for adjustment. The appearance of integrity issues and contractual controlling just became the opportunity for adjustment.
However, are the integrity issues of Chinese enterprises serious enough to be "collectively banned"? Wang Ran believed this was just a panic sentiment. Because so far, the companies exposed by the media for financial fraud are not usually well-known or first-tier companies.
"China already has at least hundreds of companies listed on the New York Stock Exchange and NASDAQ. In such a large base, the occurrence of individual financial problems, while we do not wish to see it, can also be explained from a probability perspective." Wang Ran said, "This is also the reason why the stock market still has some support."
Liu Erhai attributed the slump in concept stocks to unresolved uncertainty factors. "Integrity issues, contractual controlling events, etc., currently do not have particularly clear answers. When will they recover from the slump? It depends on when these factors become certain things."
Recently, there has been a rebound in Chinese concept stocks. Wang Ran's inclination is: it cannot be ruled out that some supported stocks, including Sina, may grow and rebound first, but overall, Chinese concept stocks remain in a depressed state in the market and will continue for some time.
"As for whether it will be six months, nine months, or one year? Everyone has different outcomes. If I must give an answer, I tend to believe it won't be too long," Wang Ran said.
The Window for Going Public in the US is Half Closed
In the context of dramatic fluctuations in the capital market, the wave of Chinese Internet companies going public in the US in the first half of the year seems to have slowed down. Tudou’s repeatedly delayed IPO plan and Xunlei's outright postponement of its IPO suddenly made the topic of going public in the US delicate: Has the slump in concept stocks closed the IPO window?
In Wang Ran's view, the IPO window cannot be said to be completely closed, but at least it is already half closed. And with the instability of the entire capital market's confidence in Chinese concept stocks, going public will not result in good valuations.
For companies hoping to go public before the window closes, Wang Ran's advice is to take a long-term perspective and carefully consider: if you make great efforts, even resorting to fraud to go public, and finally manage to achieve it勉强, it could possibly be worse than not going public at all. Because without price-earnings ratios, no attention from investors, and constant scrutiny from lawyers and specialized companies exposing fake accounts, it is actually a very arduous process.
Liu Erhai pointed out that under such circumstances, companies can choose to continue raising funds through private equity markets or seek merger and acquisition opportunities, still realizing corporate value. Due to the many clever structural ways of mergers and acquisitions now, entrepreneurs can start businesses on a larger platform, which is indeed a more relaxed path compared to IPOs during market turbulence.
However, this overall slump in Chinese concept stocks may not necessarily be a bad thing for Chinese enterprises. Wang Ran believes that this fluctuation will reveal some issues and provide entrepreneurs with insights: the entire focus of the enterprise should still be on how to broaden its business and scale up.
"Currently, the combined market value of generally fraudulent companies is only a few hundred million dollars. When a company reaches a certain size, for example, listing with 1 billion USD, I believe the probability of most companies engaging in fraud will naturally decrease," Wang Ran said. (Cui Xi)
Below is the full transcript of the interview:
Continued Slump in Chinese Concept Stocks
Host Cui Xi: Good afternoon, netizens of Sina! Welcome to the Sina Technology interview room! Today, we are delighted to have two guests to discuss the controversies surrounding concept stocks. Sitting to my right is the CEO of EKAI Capital, Mr. Wang Ran, and the other is the Director General of Legend Investment, Mr. Liu Erhai. Please welcome both of them to greet our online friends.
Wang Ran: Good afternoon, everyone, netizens of Sina!
Liu Erhai: Good afternoon, everyone!
Host: Both of you are old friends of Sina Technology and have often discussed topics related to capital. Chinese concept stocks reached a new peak in April this year, but after May, they suddenly plummeted. This situation is somewhat like a roller coaster. What do both of you think about the situation of Chinese concept stocks?
Wang Ran: In the last few days, we saw a rebound in the stock market. This time, the overall decline in Chinese concept stocks was not individual stocks but rather a general decline. The most fundamental reason is that in the previous period, some Chinese concept stocks indeed had inflated valuations in the stock market. This is the basic logic of business. When there are indeed inflated components here, the market will definitely find an opportunity to adjust, and this opportunity requires the comprehensive action of external forces. Precisely at this stage, the so-called external forces appeared, such as integrity issues, VIE issues, etc. These factors converge together, providing a very good opportunity and background for the overall market adjustment. So-called short-selling institutions in the market also found good support, leading to a significant downward adjustment in the overall Chinese concept stocks.
Now, the question people ask most is, how long will this adjustment last and what will be the trend in the second half of the year? I often joke that if you ask all investors in the US now about the status of Chinese concept stocks, the answers they give might all be irresponsible. That is, it could be a long time, or it could be short, indicating that everyone does not have a clear expectation.
However, I think since the basic factors causing this adjustment have not fundamentally changed, such as integrity issues have not been completely eliminated. Until now, questions related to integrity, financial fraud, and the VIE model have not been thoroughly resolved. In this situation, I personally tend to believe that although some individual stocks, including Sina, have shown a significant rebound in recent days, stocks with support will rebound first. However, the relatively depressed state of Chinese concept stocks in the market will continue for some time. As for whether it will be six months, nine months, or one year, everyone has their own interpretation. If I must say, I tend to believe it won't be too long.
Liu Erhai: Some people did research before, saying that Chinese concept stocks listed in the US are more affected by either the US stock market or the economic situation in China. A few years ago, that study seemed to conclude that they were more influenced by the overall US stock market. But today, the situation is not like that, because the overall US stock market has not experienced significant fluctuations, whereas the Chinese stocks have experienced very large fluctuations. This phenomenon has changed for several very important reasons.
First, information transmission is not easy, especially for a country like China, which has a different ideology from the US, and the currencies are not entirely the same and not freely convertible. Some information transmitted here is either exaggerated or drastically reduced. Exaggeration means the matter is extremely good, or the matter is very bad and terrible, easily leading to extremes. This can explain the current situation, from being very lively to becoming less lively, slightly depressed. As Mr. Wang just mentioned, when will this situation recover or adjust? It may still require market factors to be released first, meaning that the uncertainties people perceive need to become certain. In the past, in comedy shows, they often said that after throwing one shoe, they waited for the sound of the other shoe landing, which represents this uncertainty. Recently, we have seen many events, including VIE and other related corporate matters, and these issues currently do not have clear final answers. It may be like an earthquake; after the earthquake, people panic, adapt for a while without another earthquake, and then adapt again.
Wang Ran: Even a slight aftershock would suffice.
Liu Erhai: Another point is that positive factors, such as corporate earnings releases, can restore confidence. Everyone says that Chinese companies have various issues, and indeed, many enterprises have problems. However, most of the internet companies that went public this time are quite good and have performance. The number of companies with no profit or very little profit is relatively small. Therefore, positive factors need to change the situation gradually, quarter by quarter, releasing good results, performing well... relying on these positive factors to change the situation.
Financial Fraud is Just an Individual Enterprise Phenomenon
Host: The first factor mentioned earlier is the issue of financial fraud. Feedback from the US suggests that the problem of Chinese enterprises committing fraud is severe. Are Chinese enterprises really that severely engaged in fraudulent activities?