Extra, extra, read all about it: China’s stock bubble not yet popped. The latest proof comes from the public offering of Chinese financial news group Xinhua Finance Media’s shares on the Nasdaq Stock Market.
True, the shares fell 9% on the first day of trading. Still Xinhua managed to raise a hefty $300mn in a deal that valued the company at $883mn, or a mind-boggling 92 times its 2006 operating profit. There’s an old Chinese proverb—“when the ducks quack, feed them.”
But anyone snapping up Xinhua today could face a bout of indigestion later. Xinhua is certainly offering some juicy tidbits. Profit more than doubled last year to $3.3 million. It expects TV revenues to grow more than 80% annually.
The media group plans to supercharge further expansion with a string of acquisitions. The US listing added another $204 million to its cash pile to finance further shopping. But these details count for little. What really excites investors is the potential size of the market which Xinhua is operating. The promise of billions of future customers is what makes China’s current bubble similar to the dotcom boom.
This promise shouldn’t delude investors as to the risks. Due to a dual-class voting structure, parent company Xinhua Finance Limited and insiders control 85% of votes. And judging by the eight pages of related-party transactions disclosed in the prospectus, the media group is fraught with potential conflicts between insiders and minority shareholders.
But questionable corporate governance is the norm in corporate China and isn’t in itself enough to deter greedy investors. Despite its globe-rattling tumble two weeks ago, the Shanghai Composite Index has more than doubled over the past year.
Chinese authorities have made repeated, if mostly unsuccessful, moves to tamp down on this speculative fervour. There’s no doubt they will eventually succeed. Then Xinhua’s shareholders could find themselves stuffed.