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Overseas fever of Tsingtao Beer

By Zhang Ran (China Daily)
Updated: 2008-09-08 11:50

"At 10 o'clock, when the number '168' flashed up on the big electronic board, the trading hall of the Hong Kong exchange suddenly broke into unceasing applause," reported the Shanghai Securities Journal in describing a mainland company's debut on the Hong Kong market on July 15, 1993.

It was no normal opening ceremony and in several decades, none has matched the excitement as the day when Tsingtao Beer became the first mainland company to be listed on an overseas exchange.

Top officials, including the chairman of the newly established China Securities Regulatory Commission, chairman of the Hong Kong Securities Regulatory Commission, and chairman and vice-chairman of the Hong Kong exchange all attended the ceremony.

It was indeed a great breakthrough. Though most foreign investors were barely familiar with any Chinese companies at that time, as most were State-owned and State-run, a successful promotion and a well-known brand made Tsingtao's IPO popular. In merely seven days, Tsingtao Beer's shares were 110.5 times oversubscribed.

Even few Chinese expected the old companies would become the first to go abroad.

In 1903, two businessmen, German and British, invested 440,000 yuan and opened a brewery in Tsingtao, now known as Qingdao. The company, registered as Nordic Brewery Co Ltd (Tsingtao Branch), was the first brewery set up with European technology on the mainland. It produced 2,000 tons of beer each year, and was originally sold in Shanghai, Tianjin, Yantai and Dalian.

From 1915 until 1945, Tsingtao was under Japanese management, that had confiscated the German share and bought the British share after World War I.

After World War II the brewery was briefly under the control of the KMT government in Nanjing. However, in 1949, when the People's Republic of China was founded, the company became a State-owned enterprise.

The company was restructured in the early '90s and in 1993 merged with three other breweries in Qingdao. Today 27 percent of the company is owned by US beer giant Anheuser-Busch.

After more than 100 years of ups and downs, the pioneer brewery has developed into today's Tsingtao Brewery Co Ltd.

However, China's opening and reform policy did not always bring good news to companies. Even though the country's beer production rose from 680,000 tons in 1980 to 10.05 million tons in 1992, Tsingtao Beer's productivity did not witness any growth after it reached 100,000 tons in 1986. Its market share dropped to 1.3 percent in 1992 from the 13.6 percent in 1980.

Like many State-owned companies at that time, the rigid system made it hard for a company to adapt itself to a gradually more flexible economy. What is more, since most of the profits were submitted to the State, the company needed constant financial support to remain in business.

But 1992 was a turning point. After a spring tour by then-State leader Deng Xiaoping, the country made a bold step forward and established a goal to build a market-oriented economy. And for the first time, the reform of State-owned companies was on the agenda.

In September, nine State-owned enterprises, mainly manufacturers, were selected by the National Economic System Reform Commission to conduct share restructuring. Meanwhile, they were told to prepare for overseas listings, even though few of them really knew what the term meant.

Companies such as Sinopec Shanghai Petrochemical Co, Ma Steel, Yizheng Chemical Fiber Co Ltd, and Tsingtao Beer were on the list. At that time, except for a guide rule released by the National Economic System Reform Commission, there was no law or former practice for these companies to follow.

Eight months later, Tsingtao Beer, the only fast moving consumption goods manufacturer among the nine pioneer companies, was listed on the Hong Kong and Shanghai stock exchanges.

Pains and gains

The dual listing helped the company raised HK$889 million in Hong Kong and 638 million yuan on the mainland. After the listing, the company's debt to asset ratio was reduced from 70 percent to 29 percent.

Yet what it harvested was much more than funds.

"For the first time, Tsingtao Beer knows what it means to be international," Yuan Lu, assistant to Tsingtao Beer's board chairman, who was in charge of the company's investor relationship at that time, said in an interview with Merchants Weekly. "Just as people are now familiar with the concept of the WTO, for Tsingtao Beer it was like being part of the WTO 10 years in advance.

"When the door to the international market was suddenly opened to our old State-run company, it was like a primary student who suddenly went to a university. Everything was brand new and hard to adapt," Yuan says.

"The biggest difficulty was that you had to show enough integrity and build a very transparent system. You had to fulfill every promise you made in the IPO and inform investors where you spent every penny." Yuan says, adding that it was like a sports match. "If you join an international game, you have to follow the rules."

For many mainland companies, it wasn't hard to write a standard feasibility study report at that time. However, few companies will follow the report exactly when making a strategic investment. However, for Tsingtao Beer, now an international listed company, its board of directors must review every detail of the report and ensure all the plans are fully executed.

"Those are international norms," Yuan says. These norms also include submitting standard annual and half-year reports on time and making announcements and statements regarding significant issues.

Of course, the capital market not only brought such "pains" or "troubles". It also brought Tsingtao opportunity to fund its own development.

Like most of the other H-share companies, Tsingtao Beer's share slumped into a historical valley during the 1997 Asian financial crisis. Tsingtao Beer's H shares were priced far below its net assets, which meant the company was heavily undervalued.

Tsingtao Beer learned to use "share redemption" to change the gloomy situation. Share redemption meant a company bought back the shares from the market and wrote them off. If the share price went up again, the company issued the same amount of shares at a price equal to the market price. With it, Tsingtao Beer was back to a normal value and also became the first mainland company to use the share redemption tool.

In October 2002, Tsingtao Beer launched its biggest private placement in the capital market. Following a strategic agreement with the world's No 1 brewer Anheuser-Busch, Tsingtao Beer issued 1.416 billion yuan worth of convertible bonds to its foreign partner. The bonds were sold in three batches, each of them having a 7-year life span. The private placement led Anheuser-Busch to take a 27 percent share in Tsingtao.

Four waves

It has been 15 years since Chinese companies were first listed overseas. Since then, some companies have enjoyed hot pursuit; some saw their shares exceeding the issue price, and some shares are now merely worth a few cents. The overseas stock market had altogether witnessed four waves of "China fever".

Soon after the China Securities Regulatory Commission was established in 1992, China saw its first batch of companies listed abroad. Besides Tsingtao Beer, they included Sinopec Shanghai Petrochemical Co, Ma Steel, and Yizheng Chemical Fiber Co Ltd.

Most were in the manufacturing industry due to China's long history of manufacturing and its governmental support of the industry. Also foreign investors saw the country's GDP growing two times faster than the average world economy and they were confident that China had great potential.

However, the first China fever wave quickly faded. Part of the reason was due to the Mexican financial crisis. But Chinese companies' flat mid-term and year-end financial results, as well as unsophisticated management experience, were more important reasons to disappoint international investors. They started to doubt the future of the Chinese manufacturers.

It was true. Even though many overseas listed Chinese companies had conducted share restructuring, the lack of a sophisticated system in corporate governance, especially a system to encourage the management level, still blocked the company's performance.

After the first wave, Wall Street soon found alternatives to Chinese manufacturers. This time, they cast their eyes on infrastructure. Flagship companies in the aviation, railway, highway, and power industries were heavily pursued. But like the first batch of overseas listed companies, when the slowdown of China's economy threw many infrastructure builders into losses, the second wave shrank.

At the end of 1996, red chips began to lead the third wave. Red chips are mainland firms registered and listed overseas. These companies are mainly listed in Hong Kong and via American depositary receipts, their securities can be traded on the New York Stock Exchange. Some include China Merchants Holding (International) Co Ltd, Huarun Resource Enterprise Ltd, Shanghai Industrial Holding Ltd, and Beijing Enterprise Holding Ltd. Foreign investors believed that since these companies were registered in Hong Kong, they might have more flexible management styles. However, that fever ended in October 1997 with the Asian financial crisis.

On February 17, 1999, Qiaoxing Univ Telephone, a Guangdong-based telephone manufacturer, was listed on the NASDAQ, becoming the first Chinese private company to do so. On its debut, the company's shares soared as much as 268 percent. On July 14, 1999 China.com was listed on the NASDAQ. Its share price soared from $20 to $67.2 on the first trading day, a 235 percent increase.

The worldwide Internet boom triggered the fourth wave of overseas listings, which still linger. The legend of Microsoft and Google.com on NASDAQ encouraged Chinese hi-tech firms, and new energy firms as well as firms from other areas to seek opportunities in the overseas capital market.

Unlike the former three waves, most of these companies are privately owned and widely known by Chinese people. Companies such as Sina.com, Sohu.com, Baidu.com, Suntech Power Co Ltd, New Oriental Education & Technology Group, and Alibaba.com.cn went to the US capital market one after another, creating China's own wealth legends overseas. And the stories are still continuing.