Across The Border

How a popular Chinese toothpaste maker functions like a hedge fund

PUBLISHED : Thursday, 26 January, 2017, 4:55pm
UPDATED : Thursday, 26 January, 2017, 10:04pm

As the 3,000-odd A-share companies tally their equity trading accounts for 2016, Liuzhou Liangmianzhen, one of mainland China’s most popular toothpaste makers, emerged the winner after pocketing a handsome gain from selling its shares in Citic Securities to boost its bottom line.

According to a filing to the Shanghai Stock Exchange, Liangmianzhen, based in Guangxi Zhuang autonomous region, sold 11.62 million shares of Citic Securities, the country’s largest brokerage, for a profit of 157.6 million yuan (HK$178 million).

Factoring in the one-off gain, the company – which uses the brand name of LMZ for its oral hygiene products – is expected to post full-year 2016 earnings of between 22 million yuan and 25 million yuan, the filing said.

For the first three quarters of 2016, Liangmianzhen lost 92.2 million yuan, according to its third-quarter earnings report.

Without the one-time gain from selling the Citic Securities shares, Liangmianzhen would have been in the red for the second consecutive year.

In 2015, the company posted a loss to the tune of 173.3 million yuan.

“Liangmianzhen is lucky to have owned lucrative assets like Citic Securities shares,” said Zhou Ling, a hedge fund manager with Shanghai Shiva Investment. “But regulators and investors should focus on assessing a public firm’s underlying assets.”

On the mainland stock market, companies reporting losses for three years in a row face delisting, but most of the under-achievers resort to exceptional gains to avoid being expelled.

Only 2 per cent of mainland-listed perennial loss-makers have been delisted since Beijing established the stock market in 1990, compared to 5 to 6 per cent in developed western markets.

A low delisting ratio has been seen as one drawback of the mainland stock market because the loss-making underlying assets couldn’t generate returns for investors.

The China Securities Regulatory Commission (CSRC) has been trying to fine-tune delisting rules to improve the overall quality of listed companies, but no substantial progress has been made so far.

In 2012, the Shanghai and Shenzhen stock exchanges said habitual loss makers couldn’t count on exceptional gains to avoid delisting, but they waived the rules the following year, letting firms rely on profits derived from one-off deals to maintain their listing status.

According to data provider Wind Information, 43 out of 50 special treatment firms – those reporting losses for two consecutive years – have published statements that forecast profits for 2016.

Retail investors in China have a penchant for chasing special treatment stocks which could turn losses into profits via asset revamp deals. The frenzied buying on those companies often result in a roller coaster ride, leaving speculators carrying the empty bag.

Chinese loss-makers in a sprint to chase one-off gains, keep listed status

“Regulators’ years of efforts to curb irrational trading of special treatment firms proved unsuccessful,” said Ivan Li, a trader at Everbright Securities. “A large number of investors would still rush to buy loss makers once rumours about potential asset restructuring deals surface.”

Liangmianzhen would have fallen into the category of special treatment firms if it had reported losses in 2016.

In the fourth quarter of 2016, shares in the company jumped 13 per cent compared with a 3.3 increase in the benchmark Shanghai Composite Index in the same period.

In 1978, state-owned Liangmianzhen was the first mainland company to add ingredients from traditional Chinese medicines into its toothpaste products, catapulting it into the national limelight.

From 1986 to 2001, LMZ was China’s No 1 toothpaste brand as its annual sales topped domestic rivals for 16 consecutive years.

In 2004, the company conducted an initial public offering (IPO) on the Shanghai Stock Exchange, netting 683 million yuan.

Competition on the mainland’s toothpaste market escalated in 2000s amid the entry of foreign brands such as Crest and Colgate and the rise of indigenous brands including Zhonghua and Yunnan Baiyao.

In 2007, LMZ toothpaste recorded sales of 178 million yuan, a sharp drop of 43 per cent from the previous year, starting a downward momentum.

The company said it was developing high-priced premium toothpaste products and increasing spending on advertising to attract consumers.

Liangmianzhen also diversified into real estate and medicine businesses to improve its performance.

In August, 1999, Liangmianzhen became a founding shareholder of Citic Securities, buying 95 million shares of the brokerage for 152 million yuan, or 1.6 yuan apiece.

In 2014, Liangmianzhen sold 10 million shares of Citic at an average price of 30.18 yuan before it sold another 661,100 shares the next year at 25.38 yuan.

Shares of Citic Securities closed at 16.48 yuan in Shanghai on Thursday. Liangmianzhen ended at 10.46 yuan on Thursday, 14.3 per cent up since the start of 2017.