China Companies
Across The Border

Family businesses face market scrutiny as second generation takes control

Investors await signs of more globally-focused business models as young bosses take the reins from their parents

PUBLISHED : Friday, 11 November, 2016, 1:56pm
UPDATED : Friday, 11 November, 2016, 10:22pm

More than a dozen mainland-listed companies are drawing the attention of investors as their founders pass management control to the next generation, allowing several twenty-somethings to take the helm amid an economic slowdown.

According to Securities Times, 10 companies saw the second generation succeed their parents to become bosses this year, with another three making preparations for a handover of power.

The reshuffles involving firms owned or run by Chinese families come at a time when the country is striving to overhaul a slowing economy amid mounting concerns that business morale among mainland entrepreneurs is declining sharply.

It is well understood that the children will have totally different ideas than the founders
Zhang Qi, analyst, Huatai Securities

Analysts say the companies will find themselves under close market scrutiny as investors await signals as to how the new generation of directors might change the business model.

“Investors will keep a close watch on their business decisions before reassessing the value of the companies,” said Huatai Securities analyst Liu Qiaoyu. “Capable and determined young bosses will be able to convince investors of the companies’ long-term growth potential.”

The first generation of Chinese entrepreneurs set up companies in the sectors of manufacturing, construction, real estate and trade in the 1980s or ‘90s as the country embarked on a market-based reform process.

Their enterprising spirit and high risk appetite netted them vast fortunes, some of them becoming the richest people in the country.

“It is well understood that the children will have totally different ideas than the founders,” said Haitong Securities analyst Zhang Qi. “The successions could mean something for the companies’ future, but big changes might not happen soon.”

Many observers believe family-owned businesses will have to conduct major overhauls in the coming years to adapt to the transition of the Chinese economy into a model driven by consumption, rather than exports and investment.

Peter Englisch, global leader for family businesses at consultancy EY, said that the second generation of mainland family-run companies were now considering entering into businesses with a more global perspective.

In such cases, part of the families’ wealth might be allocated to foreign equities or properties as a way of diversifying assets.

Following two decades of breakneck growth, China’s economy slipped last year with gross domestic product expanding at the slowest pace in 25 years.

The slowdown has taken a toll on privately-owned businesses as thousands of companies grapple with thinner profit margins.

Investment by non state-owned firms has continued to dwindle this year, a clear signal that business owners are reluctant to expand production amid higher land prices and labour costs.

The dire scenario is in stark contrast to an initial public offering bonanza between 2010 and 2011 when dozens of billionaires were created through listings on the A-share market. At that time, the first generation of entrepreneurs were relishing their success as their businesses flourished.

The sedated stock market has exacerbated bearish sentiment among entrepreneurs despite a much-hyped “new normal” pattern under which the Chinese economy would grow at a slower but more sustainable pace.

A sharp fall in the A-share market last year wiped out US$5 trillion of capitalisation and the key indicator is now nearly 40 per cent below the high reached in June of 2015.

Lutai Textile and Shenke Slide Bearing, both traded on the Shenzhen Stock Exchange, are now under the leadership of two young entrepreneurs – Liu Deming and He Jiannan – who were born in 1990 and recently over from the previous generation.

Shares of Lutai have stayed flat since the succession last month while Shenke saw its shares drop almost 3 per cent from early August when He was appointed chairman of the company.

Most of the second-generation bosses received higher education, according to Securities Times, with five of them holding masters degrees.