Shenzhen is the only downer this year among major Asian stock markets.
The Shenzhen Composite Index, often referred to as China’s NASDAQ, fell about 4 percent in US dollar terms, a sad result compared with the more than 35 percent gain in Hong Kong’s Hang Seng Index.
The Shanghai Stock Exchange SSE 50 A-Share Index, the so-called “Beautiful 50” gauge of China’s top blue-chips, advanced 25 percent.
Beijing is blaming Shenzhen’s dismal report card on one man, Jia Yueting (賈躍亭), founder of and the biggest stakeholder in Shenzhen-listed Leshi Internet Information & Technology Corp (LeEco, 樂視).
At its height in May 2015, LeEco was worth more than 150 billion yuan (US$23 billion), ahead of the cash-cow telecom-equipment maker ZTE Corp (中興) and the sixth-largest firm listed in Shenzhen.
Jia embodied the excess of China’s 2015 dot-com boom, talking of expanding his tech empire to everything from smartphones to smart cars. The reality was an alarming cash-flow profile.
Two years on, the picture could not be more different. LeEco trading has been halted for eight months after the stock lost two-thirds of its value and Beijing is making a half-hearted attempt to claw back money for shareholders.
This week, a Chinese court seized all the assets owned by Jia that it could unearth and came up with just 1.3 million yuan. The China Securities Regulatory Commission has ordered Jia, living in the US, to return to China.
Even the local media acknowledge that the regulator has no power to enforce that order.
What is LeEco worth now? At its last traded price, it was valued at 4.9 times book.
However, as a typical technology company, much of LeEco’s assets — about 30 percent — is in intangibles, often intellectual property such as know-how and patents, which could be worth nothing.
This question has vexed many Chinese fund managers. Back in 2015, LeEco was such a big name that mutual funds marched in; now, the likes of China Post & Capital Fund(中郵基金) and China Southern Fund Management (南方基金管理) are stuck.
For example, the 1.1 billion-yuan China Post Core Competence Flexible Allocation Mixed Fund still counts LeEco as its second-largest holding, at 10 percent.
Because of the eight-month halt, the manager had to write down that stake repeatedly, last month estimating that LeEco was worth 3.92 yuan per share, 25 percent of the last-traded price.
No surprise, the fund has slumped 29 percent this year.
This brings us back to the Shenzhen market: Stocks listed there provide little or no protection. The Shenzhen Composite Index is still valued at 3.1 times book and that multiple is likely to be a lot higher based on tangible book only.
By comparison, despite this year’s rally, the Beautiful 50 are trading at just 1.5 times book. More importantly, most of those companies are state-owned. If something goes wrong, the biggest shareholder — the Chinese government — would not play the catch-me-if-you-can game investors are seeing with Jia.
How times have changed. For years, Shenzhen was the destination. Now investors prefer the Shanghai market laden with state-owned enterprises.
Some might count it an achievement that Jia has sent retail investors back to the embrace of the Chinese state.
Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron’s, following a career as an investment banker, and is a CFA charterholder.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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