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16-10-2011, 05:32 PM
dzwm87 Wrote:One of my main concern is why do S-chips like to dual-list elsewhere? If it's for the additional capital, then why the need for so much capital given the strong cash holding? "Chinese liking to hold lots of cash" isn't a good reason unless we know why they LIKE to hold it. Besides, it is common sense that business that constantly require placement burns capital and is never good for shareholders (let alone minority ones like us). The only other reason I can think of is that other listing allows better valuation. If that's the case, then the company no longer has any incentive for their listing in SGX to attain "fair valuation" since this will be better attained elsewhere (HK/Taiwan).. Might turn out to be a value trap.
Some plausible answers:
1. Some or all of the cash is fake. Real money must be injected from time to time for the show to go on.
2. The company is desperate for cash.The company is real, but it has some massive capital needs coming up and it can't or doesn't want to borrow.
This is possible as borrowing by non-SOEs is getting harder in China. But if so, is the company wise to be expanding on such a large scale that it cannot fund this growth internally?
Even if the expansion is the correct decision commercially, given how cheap the shares may be, the cost of capital is extremely high. Can the new project generate returns sufficient to offset the dilution to shareholders? If you issue shares at 4x PE you are implying that the new project can generate after-tax IRRs of over 25%. This is very tough in practice. A lot of projects look like that before you put the money down. Few actually deliver.
3. False beliefs. The controlling shareholders believe that a dual listing will:
a. improve liquidity since there are potentially more investors who can buy the shares; and
b. reduce undervaluation since more investors theoretically means more efficient pricing
I would point out that the typical dual-listing only involves a small percentage of the shares issued, so usually liquidity in the new market is abysmal. Any price premium usually evaporates quickly as the new investors discover they can buy the same shares cheaper on SGX. However, instead of the SGX price moving up to the secondary market's price, it is usually the secondary market's price that declines to the SGX price. It was noted earlier this year in various articles that the dual-listing bubble had since popped, with no discernable benefits (except perhaps to the investment banks who got paid to arrange the deals).
As usual, YMMV.
