Corporate China | Battered China Minzhong joins privatisation queue

Embattled food processor China Minzhong Food (Singapore: CMFC) is discovering that private ownership is sometimes preferable to the perils of being a publicly listed firm, following a short-seller attack last week that has now been followed by a new buy-out offer. Minzhong has just been listed for just three years now, but received a big lesson last week when its stock lost half of its value in a single day after short seller Glaucus Research issued a report implying some of its financials were false or overstated. Now the company has received a generous buyout offer from Indonesia's Indofood, in what's likely to become the beginning of the end of Mingzhong's short life as a publicly listed company.

Minzhong is just the latest in a long string of publicly listed Chinese companies to come under attack over the last two years from short sellers, who have discovered these companies make easy targets to earn some quick money. I personally believe that many of the companies that have come under attack are of relatively good quality and earn reasonable profits. Their problem is one that's endemic to China, namely a strong tendency to overstate their strength and growth prospects. That habit is one that has developed over the last two decades, encouraged by China's old system of state-set targets that lead companies to turn to creative accounting to meet those goals.

All that said, the private equity and other buyers of these battered companies are probably getting very good value for their money, since most of these firms have relatively stable and sound business despite their tendency to exaggerate.

Shareholders who were brave enough to hold the company's shares through last week's sell off and now choose to accept the buyout offer will end up making a modest profit, since the stock was trading at about S$1 (HK$6.08) before the short seller attack. Minzhong is probably better off as a privately held company anyhow, since its shares never performed very well in its brief history as a publicly traded firm. They briefly peaked at around S$1.80 (HK$11) in 2011, but have mostly traded around the S$1-$1.20 level since then. Such lackluster share performance is a frequent problem for not only Chinese companies but small firms in general, which often have difficulty getting noticed by investors.

So, what's the lesson in all this for these companies and investors? For investors, the answer is that these small Chinese firms remain risky propositions that could make good buys after short seller attacks. Minzhong is a great case in point, as anyone who bought shares after the sell-off will get a return of up to 100 percent or more on his brief investment.