China's Nexteer a model for transparency, corporate governance
Car parts supplier tops list of companies with the most sound corporate governance standards
Corporate governance is a buzzword for investors, not least those still stunned by last month's collapse in the share price of troubled Hong Kong-listed mainland solar company Hanergy.
A 47 per cent fall in barely an hour is a rarity in a stock market regulated to tough global standards.
That it happened - after a spectacular 246 per cent rally over the previous 12 months - is a warning to investors of what analysts at Macquarie in a new report call "structural corporate governance challenges that are virtually unique in global emerging markets" of holding stock in some mainland Chinese companies.
Of the 1,000-odd listed mainland firms in Hong Kong, Macquarie's list of companies with the most sound corporate governance standards amounts to just 80.
Top of that list is Nexteer Automotive a Hong Kong-listed steering and driveline systems producer that was acquired in 2010 by Pacific Century Motors, an investment arm of the Beijing municipal government.
"We rate Nexteer as one of the highest quality companies we cover and continue to see long-term upside," equity analysts Jake Lynch and Shannon Wu said in the report. They said the stock, which has just reached Macquarie's 12-month price target, still has over 100 per cent upside potential over the next three years.
One of the big positives for Nexteer is that it publishes details of the backlog in its order book - a level of transparency that sets it apart from many other mainland firms - allowing investors to plot the likely trajectory of earnings growth.
The downside for the stock in Macquarie's book is that all Nexteer directors are Chinese nationals, indicating a lack of diversity given the global nature of the company and that a single customer - General Motors - generates more than 50 per cent of revenue.
Nexteer is also controlled by Aviation Industry Corp of China, a state-owned maker of fighter jets to military engines. State ownership is "a mild negative" according to the report, though it adds that "the risk of a serious problem is lower than with non-state-owned companies in China".
Moving from the steering wheel industry, Macquarie also favours Yip's Chemical, a company with no corporate governance incidents in the past quarter century.
"Compared to our universe of top picks, Yip's scored above average in corporate governance but below average in risk," the report said, pointing to challenges from industry-wide problems of overcapacity.
"The dividend has (also) been reliable in difficult times and access is good," it added.
The potential to consolidate China's fragmented household paint market is one of the drivers behind Macquarie's belief that industry leaders such as Yip's should benefit from the removal of overlapping competitors and thus boost their profitability.
But the chemical company is not a model of perfection. Yip's suffers from low return on invested capital and the nature of the industry leads to volatility in margins, the bank noted.