AS CHINA pushes hard to open the way for its cash-strapped enterprises to gain fund-raising opportunities overseas, many are turning their attention to the possibility of listing in Japan. Chinese companies wanting to issue shares on the Tokyo Stock Exchange would be well advised to factor in the risks of low liquidity which have tarnished trade in the first two Chinese concerns with primary listings in New York. After the initial fanfare of their New York listings, mainland power firms Shandong Huaneng Power and Huaneng Power International have languished below their issue prices in slack trading. Their experience goes to show that coverage by analysts and a good supply of interested investors familiar with China are crucial to the liquidity of a stock. Bankers Trust International Asia research vice-president Lily Wu said: 'If you list in a non-China market, you can easily fall between the cracks.' The World Bank, in a report on China's emerging capital market carried out with the China Securities Regulatory Commission, said: 'The poor performance of the N-share ADRs (American Depository Receipts) has been attributed to the lack of dual liquidity with a regional Chinese market (such as Hong Kong) where investors have access to company information. 'A key concern with listings in new exchanges will be the degree to which liquidity can be expected.' This concern is shared by Japanese brokers, who are worried about the potential problem of slack trading of Tokyo-listed Chinese companies. It extends also to many European and US companies with secondary listings in Tokyo who are defecting from the exchange due to sluggish trading. An official of Nomura Securities in Tokyo said: 'There's always the worry [of low liquidity], but we will try not to allow that to happen. In general, if you compare Japanese investors with US investors, the former know more about Chinese companies due to Japan's proximity to China.' As a result of geographical location, the Tokyo Stock Exchange will bridge the time gap between that in Hong Kong and New York. 'Under current circumstances, I believe that Japan is the best market to come to compared with Hong Kong,' the Nomura official said. He pointed to Japan's low deposit rates, listless stock market and the stabilisation of the yen's exchange rate. 'It is now time for foreign equities. Japanese investors really want fast-growing ones, ones in Asia.' High price-earnings (p/e) multiples and an untapped market of Japanese investors are cited as the main attraction for Chinese listings. According to profit estimates by Daiwa Securities, Japan's petrochemical sector is trading at more than 50 times prospective earnings, the motor sector almost 60 times, pharmaceuticals 30 times and power stocks at a multiple of 43. Some stocks have reached a p/e of more than 200. Daiwa Securities Beijing office representative Ted Tokuchi said: 'It doesn't mean that Chinese enterprises will enjoy the same p/e as those Japanese enterprises because Japanese investors will compare the mainland stocks with those in Hong Kong.' He said the high p/e's were usually shored up by the limited number of floating shares caused by cross-shareholdings among big Japanese corporations and speculation over a stock's hidden assets. Japanese brokers also caution that p/e is not the only measurement of a stock's value, as Japanese investors also look at dividend yield and the book value of assets. So whether Chinese companies will have a higher p/e in Japan than in Hong Kong remains untested. However, the brokers said Japanese investors would be willing to pay a slight premium for Chinese shares if they could trade directly in yen without bearing foreign exchange risks. Mr Tokuchi said Japanese individuals had financial assets of 1,100 trillion yen (about HK$79.859 trillion) all told, but only less than 15 per cent was invested in listed securities, compared with more than 30 per cent by US investors. Nomura International (Hong Kong) executive director Junichi Goto said: 'The purpose of a Tokyo listing is to get Japanese investors.' He said a Tokyo-listed Chinese company would attract Japanese investors who were reluctant to go abroad buying B shares or H shares. B shares are foreigners-only shares listed in Shanghai and Shenzhen, and H shares are Chinese enterprises traded in Hong Kong. 'There are many retail investors, not only institutional investors, who are keen about Asian equities including Hong Kong and Chinese stocks,' Mr Goto said. He said Chinese stocks that Japanese investors would find particularly attractive included those in the fast-growing infrastructure, pharmaceutical, power, petrochemical and motor industry sectors. But Chinese companies do not yet have a clear path to Japan as both countries are still discussing a memorandum of understanding (MOU) for listings. A CSRC official said: 'When an MOU is signed will depend on our progress because it involves many legal questions and accounting standards issues.' She said the commission had not selected any candidates for listing in Tokyo. However, Japanese brokerages have already been battling for sponsoring mandates. Nomura International is said to act for the Shanghai-listed A-share counter North China Pharmaceutical in seeking a listing in Tokyo. A North China official said the group favoured a listing in Tokyo over Hong Kong and its management visited Japan last year. As the world's second largest antibiotics manufacturer, its net profit reached 243 million yuan (about HK$223.5 million) in 1994. Nikko Securities is reportedly bidding for the mandates for Jinling Petrochemical and Qilu Petrochemical. Mr Tokuchi said Daiwa was also seeking to clinch the first Chinese flotation in Japan. Since January of last year, the Tokyo Stock Exchange has been reforming its restrictive listing system. Measures include a reduction of the minimum requirement for shareholders' equity from 100 billion yen to 10 billion yen and a cut in profits requirement from 20 billion yen to two billion yen. It has also accepted primary listings by overseas issuers. When Malaysia's YTL Corp is listed in Tokyo this month, it will become the first non-Japanese Asian company with a secondary listing and the litmus test of Japanese investors' appetite for Asian equities.
