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China: The US Investor Point of View. Effective IR Starts With Strategy…. Developing an Investor Relations Strategy. Media Strategy. Perception Studies Market Intelligence. Strategic Counsel. Peer Analysis Message. Corporate Governance. Adding Value.

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China: The US Investor Point of View

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Effective IR Starts With Strategy…

Developing an Investor Relations Strategy

Media Strategy

Perception Studies

Market Intelligence


Peer Analysis




Adding Value



Corporate Position

Shareholder Analysis




Website Strategy

& Content

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and Uses the Right Tactics to Deliver the Story

Tactics for Communicating with Investors

BG NewsWatch

Road Shows


Web site Design


Site Visits



Delivering the Story

Fact Sheets

White Papers

Media Interviews


SEC Filings

Annual Reports




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The Background

  • Interviewed US investors with a strong interest in China

  • All manage global or emerging market funds

  • The goal: assess attitudes and concerns about investing in Chinese securities

  • Identify preferences and communications related issues

  • Discussions lasted from 20 minutes to 1 hour

  • Interviews are based on a questionnaire

  • This study summarizes investor perceptions

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Most US Investors Think China Has a Lot to Offer…


“Economic growth is strong and the whole region is entering rapid development, a lot of value is being created.”

“Many areas are still very attractive with valuation around a 10x PE and potential growth rates of 20-30% over the next 5 years.”“Valuation is higher than 2 years ago, but I think there is still value to be made, especially for the long term investor.”


Growing Domestic Market

“An emerging middle class is driving the economy, so the government can balance economic growth between export and domestic consumption.”

Supportive macro-economics

“The government has done and is doing a tremendous job to keep everything running smoothly.”

“Domestic infrastructure for various things continues to improve.”

Growing Capabilities

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… Recognize the Progress Being Made on Many Fronts ...

  • Two years ago, Suntech had no local sources of raw materials and components for solar cells, Today, there are a number of companies developing capacity to make raw materials and components locally.

  • Government will have supportive macro and fiscal policies at least for the next two years before the Olympics.

  • The Government is going sector by sector trying to increase the capital of companies in the private sector.

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… And Are Beginning To Take a Longer Term Interest in Chinese Stocks

  • “Until recently, there had always been that feeling that China was just another bubble that could burst from moment to moment.”

  • “… everyone in the West is trying to figure out what is going on in China. You have a fair amount of institutions that really understand what is going on there, and another, even bigger group of fairly sophisticated investors who really don’t know what to make of it.”

  • “I believe China is an interesting long term investment opportunity. The whole region is developing and a lot of value is being created.”

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Yet, Chinese Stocks Underperform, Especially Following Very Successful IPOs…

“Did you know, that China stock overall in the last year returned a negative 3%?”

“A lot of companies that IPOed came at a time when prices were very high.”

“If you look at the performance of the Chinese equity market against the Chinese economy in 2005, it didn’t perform that well.”

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Investors Offered Reasons Successful IPOs…

  • Business models of some IPOs are different and difficult for

    investment managers to understand

  • Decisions don’t always reflect minority shareholder interests

  • Growth stories oversold

  • Banks considered expensive relative to other global firms given quality

  • Too much top line rather than profitability focus

  • For some shares, there is an overhang of state ownership

  • Poor protection for non-Chinese investors

  • Recognition that things are changing slowly in China

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Investors Offered Reasons Successful IPOs…

  • Too much hype for sophisticated investors who want performance

    • “Show us growth and we’ll buy your shares”

  • But for some, under performance makes Chinese equities attractive since multiples are lower than those in India

  • Valuations are still attractive relative to growth and relative to US peers

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China Doesn’t Always Win Against Other Emerging Markets When Competing For Investment Dollars

“I think the only other market that offers similar potential and therefore is giving China a run for its money… is India”

“India is attracting a lot more investors in the past couple of years and might be taking money from China, simply because it is like a new theme for investors.”

“… last year, China didn’t perform that well relative to Korea for example and money flowed out.”

“China is competing for our investment dollars with all of emerging Asia: India, Taiwan, Korea. I don’t have anything invested directly in China right now, and I don’t have much in HK, because I am finding better values in Korea right now.”

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Stock Market Performance When Competing For Investment Dollars

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Investors Offered Reasons When Competing For Investment Dollars

  • India offers excellent company management, good disclosure and a huge consumer market

  • Good infrastructure, political stability, changing laws to allow foreign competition

  • India has less government intervention and more entrepreneurs but much higher valuations

  • A large number of Indian companies are listed in the U.S. with ADRs which makes them more attractive

  • Underlying valuations in Korea are attractive

  • China is more attractive than Latin America because LA has more political risk

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Stock Price Underperformance Is Strongly Driven By Underlying Concerns

Corporate Governance

“Decisions at the highest levels may not always have the shareholder’s best interest at heart.”


“The whole of Asia has an issue with corporate governance, disclosure and the willingness to make the time and the effort that it requires to get this done.”

Government Ownership/ Intervention

“Government regulation often seems fairly arbitrary and can change without warning.”

“The weakest thing is the quality of their communications, not so much the frequency or the access. The content and the analysis, how they describe their business strategy and they way they piece it together.”


Investment vehicles

“One of the main concerns that I have is the protection of non-Chinese national investors.”

“Political risk is always there.”

Political Risk

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Corporate Governance Is One Of The Top Priorities When Making An Investment Decision

“… the level of corporate governance is pretty low, I can’t think of any Chinese companies that have good disclosure policies.”

“Commercial law is not developed yet. There is no charter in the books in China that will protect ownership rights or contractor rights that will be used to uphold a contract…the laws that are in the books are very badly written and loosely enforced.”

“It is a different business climate and it requires a higher degree of comfort and cross check relative to management, ownership structure and things of that nature. So I think you have to work harder to get the same level of comfort.”

“When we don’t trust management, we don’t go near a company.”

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What Are the Real Issues? Making An Investment Decision

  • A different culture

  • Language differences

  • Accustomed to less stringent accounting and regulations than the US

  • Lack of experience in communicating

  • Government intervention

  • Competition encourages companies to make promises that they can’t deliver

  • Don’t back up projections with real facts

  • Not accustomed to supplying analytical data

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Transparency Is A Big Problem, But Has Been Improving Making An Investment Decision

“… one has to be a bit more cautious, because the level of transparency is not that good… it depends on the companies we are looking at: H shares have to comply with HK listing requirements, which are better.”

“One has to take reported earnings at face value and be somewhat circumspect about them…”

“… yes, there is a problem. Some of it is cultural. It can be a language issue. There could be many factors… lack of experience and interaction with international investors.”

“Companies like China Mobile, Telecom and Netcom – telecom companies have good transparency. So do utility companies. They give good numbers.”

“Things have been improving. A lot of managers are western educated, they are young, between 40 and 50 years old, they have the ambition to grow the company and understand the importance of capital markets.”

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Transparency Fundamentals Rating Making An Investment Decision

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Government Ownership And Intervention Making An Investment Decision

“Government participation goes to the point of corporate governance or lack thereof. Hopefully, we will never reach the point where due to political reasons, a company will take a course of action that will be dictated, not by the benefit of the shareholder, but because of politics”

“We don’t like industries and companies protected by the government, but those that grow on their own strength.”

“Government Intervention is scary because it seems to just come without warning.”

“I am not sure how I feel about government participation. On the one hand, the good thing is that it is an economy where the government’s influence is strong and so you’d rather be their friend than their foe. On the other hand, I think that over time, it can lead to inefficiencies in terms of the decisions made.”

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Investment Vehicles Making An Investment Decision

“I really would like to invest in consumer related stocks but in China there just aren’t enough vehicles. For example Wal-mart is good, but an investment doesn’t reflect only China’s growth.”

“Investing directly on the Chinese exchange for us is not that attractive, because the disclosure rules aren’t that good and the information flow is not that good out of China. The way we would invest in companies that would benefit from China would be either investing in HK shares or Taiwan shares, or other companies on other exchanges that would benefit from having exposure there, whether they manufacture there or they sell into China.”

“Access to your cash once you’ve got it in the country, that is a big issue in China.”

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Communications and Access: “They Are Not Here!” Making An Investment Decision

“You don’t want Chinese companies to come to the US so often that they can’t run their business. But a couple of times a year is nice.”

“I definitely don’t see them enough and they don’t come often enough to the United States.”

“If we haven’t met management, we usually don’t invest in them.”

“Sometimes they tell you what you want to hear. They won’t tell you bad things, unless you specifically ask them, until it is too late”.

“If you get access, you can have a great dialogue. If you do your work, you can dig through to come up with your own perspective, but they don’t do as good a job packaging and communicating the investor relevant information, on average.”

“Chinese companies may not get as much help and advice as they should about what is expected and how to present at conferences or on their conference call””

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Investors Offer Reasons Making An Investment Decision

  • Access is generally very good although the time difference doesn’t help.

  • Difficult to buy Chinese shares if they aren’t listed in Hong Kong or New York.

  • For many companies access is not a problem, but the quality of information is.

  • It is easy to see management but they must do a better job of communicating facts

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Political And Social Risks Making An Investment Decision

“Too many issues: lower wages, no real retirement plan, no insurance that will protect people in case of catastrophic illness…”

“…until it builds the proper infrastructure to support home grown demand, I think China will be a long-term investment for very patient investors.”

“The historic pitfalls are still there, and while the falls may be smaller, they still exist. I don’t expect this to change in the future.”

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Investors Offer Reasons Making An Investment Decision

  • Social unrest from those not participating in the China miracle.

  • Issues related to an aging population that require retirement benefits.

  • Issues relating to opportunities for migration from rural China to the cities.

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As A Result, Chinese Stocks Trade At A Discount … Making An Investment Decision

  • “There are some accounting differences that drive a lot of the valuation differences. When companies conform to US accounting, it is more beneficial for US investors to compare companies on an apples to apples basis.”

  • “It varies with time and there is no broad valuation gap, but we have seen things north of 20% in some instances.”

  • “I definitely think there is a valuation gap. A reasonable good US Internet company can trade at around 30x earnings per share, and a comparable Chinese Internet company would be more like 20.”

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… And Chinese Managers Have To Work Harder At Communicating Their Story

  • “…the serious institutions don’t want to hear hype. They want real business models, real growth stories, strong management teams and a favorable and stable political and economic environment.”

  • “An investor base that understands your story and is in it for the long term is difficult to identify, hard to convince and the relationship needs nurturing to make sure that in difficult times access will be easy.”

  • “I think the attitude towards investing in Chinese stocks is to be selective.”

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However, It Is An Interesting And Exciting Time Right Now For Some Sectors

“Technology has to lead the way – it is the only way it is going to catch up with the rest of the world. Technology and education and medical technology to reduce costs for its aging population.



“The financial services sector, which is deregulating and opening to foreign investment and greater competition, is attractive because it is forcing the Chinese banks to restructure.”

“China needs to fill up its energy resources, in order for its economic expansion to continue, so that makes it a relatively safe sector to invest.

Energy/ Infractruc-ture

“As people upgrade to broadband and 3D gaming, and the population continues to migrate to cities and becomes more educated and well off, they are going to be spending more money on entertainment.”

Online Gaming


“… the service industry has seen the emergence of new business models that are growing very fast.”

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Technology Companies: A Separate World For Some Sectors

“…[listing] works a little bit differently for technology companies. Often, the technology they develop is unique and may not be very clearly understood by investors in the local markets (and I am including HK here). So the international markets are really all that remains, and that is where the opportunity is.”

“In the red chips maybe it is more of a concern. Most companies listed in NASDAQ in the US are private companies in China, the government doesn’t really have any shares in those companies.”

“Most of the CEOs and the top management of Internet companies has spent a certain amount of times in the United States. A lot of them have gone to Stanford for their business school or engineering degree, and so they understand US culture.”

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Companies That Make It To The NYSE Are Held To Western Grade Accounting Standards And Have Access To Wider Visibility And A Broader Investor Base

  • “The reason why so many Chinese companies are doing IPOs in HK instead of the NYSE is basically the burden implied by SOX and the listing standards in NY are higher”, BUT…

  • “Most US based mutual funds, unless it is a global or an international fund, are not approved to invest in Hong Kong. I run a global technology fund, so I can invest in HK, but our domestic technology fund cannot, and the domestic fund is a lot bigger than the global one”

  • “Chinese companies are going to need a lot of money… strategic thinkers are going to go to markets where there is a lot of capital with some tolerance for risk, and that has always been the US.”, AND

  • “Global companies who want to be players on a global scale will need the visibility and the understanding of investors around the world and you cannot do that by being in Hong Kong only.”

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What Should Companies Do? Accounting Standards And Have Access To Wider Visibility And A Broader Investor Base

  • Consider having an investor day

  • Visit investors at least twice a year

  • Attend international conferences

  • Improve press release information and timing

  • Find ways to minimize the time difference

  • Better understand the requirements of US markets

  • Make sure information in SEC filings is well written

  • An up to date website

  • Reach out to investors

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In Summary: Accounting Standards And Have Access To Wider Visibility And A Broader Investor Base

“Overall, I think that the market is very excited about China, the potential that China has to offer, but is scared about the things they can’t see!”

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Contact Us to Learn More Accounting Standards And Have Access To Wider Visibility And A Broader Investor Base

Kay Breakstone, PresidentTel: 646-452-2332

Email: [email protected]

Alex Fudukidis, Managing Director, China

Tel: China +13701701592

[email protected]

Breakstone Group

82 Wall Street, Suite 805

New York, NY 10005

T. 646.452.2330 F. 646.452.2331