Nongfu Spring founders briefly become China’s richest man on IPO day

Zhong Shanshan, president of Nongfu Spring Company, attends the Nongfu Spring new product launch conference in Baishan, Jilin Province, China on February 1, 2015.

Jiang Shin | VCG | Getty Images

BEIJING – The public offering of a bottled water giant has transformed its founder into the ranks of China’s three richest people, thanks to an ownership structure that reflects some of the potential risks of investing in Chinese companies.

Nongfu Spring, which claimed the top spot in China’s packaged drinking water market, on Tuesday raised nearly $ 1.1 billion in its initial public offering in Hong Kong, one of the stock exchange’s biggest IPOs so far this year. Shares rose 85% from the opening price at 39.80 Hong Kong Dollars ($ 5.14) before closing more than 53.9% at 33.80 Hong Kong Dollars ($ 4.27) per share. The stock traded nearly 2.5% higher on Wednesday.

With 84.4% ownership of Nongfu Spring, founder Zhong Shanshan saw his money balloon on paper. According to Forbes, based on the price of 39.20 Hong Kong dollars per share and its other holdings, Zhejiang’s total earnings on Tuesday morning were approximately $ 59 billion.

At that stage, Zhong was temporarily China’s richest person, earning $ 57 billion of Pence Ma of Tencent and $ 51 billion in total assets of Alibaba founder Jack Ma, according to Forbes’ analysis. According to Wind Information, Zhong was the third richest man in the country ahead of the IPO.

The other aspect of Zhong’s vast wealth is that according to the company’s prospectus, Nongfu’s public holding is less than 4%.

“Given the high concentration of shareholding in a low number of shareholders, shareholders and prospective investors should be aware that the price of the shares can move sufficiently even with the trading of a small number of shares, and to exercise extreme caution when dealing Should. Shares, “the company warned in a filing.

Broadly speaking, such low percentages of publicly offered shares and high levels of founder ownership are not uncommon for Chinese companies.

Conversely, for most lists of American companies, “it is unusual for a founder or founding team to hold a position until Martin (Kenny), co-director on the Berkeley Roundtable, owns more than 50% of the firm (s) publicly . ” A distinguished professor of international economy and community and regional development at the University of California, Davis, said in an email.

He noted that for very successful US start-ups, founders do not need to give much equity and often can hold on to about 30% or 35% of the initial public offering. But “these high-level stakes are not uncommon for Chinese IPOs,” said Ken. “Furthermore, because these (such as special sustainable structures) are VIE / WOFE, there are many unusual transactions and that resemble self-dealing (especially in the case of spinoffs from other firms) in the American context.”

While not guaranteed, a more diversified ownership structure can help protect against fraud.

“The blockholder (influential shareholder) can have so much control over the company, the internal or external auditing mechanism may not work as well if there is a (diverse) shareholder base,” Zhu Ning, a professor of finance at Tsinghua University, Said in a phone interview. “Such ownership may cause some financial irregularities.”

Zhu said that in his observation, voting rights for large technology companies in the US can only be concentrated, even if not owned.

The major difference between Chinese and US financial markets remains regulation, he said, pointing to punishment for securities law violations in China relatively less severe than in the US

Mainland Chinese stocks are among the best performers in the world this year. The CSI 300 is up more than 12.5% ​​and Shanghai Composite has grown more than 5%, while the S&P 500 is down nearly 3% and Hong Kong’s Hang Seng down more than 13%.

Expectations of relatively better returns from Chinese assets have also attracted foreign investors. Mainland Chinese financial markets have been difficult to access from outside the country, but the launch of the stock connects with Hong Kong and the inclusion of some mainland stocks in the major global stock indexes gradually exposes foreign exposure to Chinese stocks have increased.