{"id":70760,"date":"2023-10-09T22:34:41","date_gmt":"2023-10-10T02:34:41","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/fishy-loan-undercuts-jiumaojius-corporate-governance-image\/"},"modified":"2023-10-09T22:34:46","modified_gmt":"2023-10-10T02:34:46","slug":"fishy-loan-undercuts-jiumaojius-corporate-governance-image","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=70760","title":{"rendered":"Fishy Loan Undercuts Jiumaojiu\u2019s Corporate Governance Image"},"content":{"rendered":"
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By Doug Young<\/em><\/p>\n

The board of trendy restaurant operator Jiumaojiu International Holdings Inc. (OTCPK:JIUMF, 9922.HK) thought it smelled something fishy when it recently noticed a suspicious 80.7 million yuan ($11.2 million) loan made in January to a company called Guangzhou Yanshang Investment. It did some sniffing around, and quickly discovered the ultimate borrower was none other than Guan Yihong, the company\u2019s chairman and founder.<\/span><\/p>\n

While this kind of insider lending isn\u2019t illegal, it should be vetted with the company\u2019s board to avoid any semblance of impropriety. And listing rules also require that shareholders should be informed. Neither happened in this case, and the board said in an announcement late Friday it only discovered the loan when it was preparing the company\u2019s interim results announcement, published on Aug. 22.<\/p>\n

In fact, the amount of the loan was quite small, especially compared with Jiumaojiu\u2019s cash holdings that stood at about 4 billion yuan as of June 30. The company operates the trendy Tai Er restaurant chain, which is famous for its \u201csauerkraut fish\u201d stewed in Sichuan-style pickled vegetables. It also has a newer, fast-growing chain called Song Hot Pot, whose revenue more than quadrupled in the first half of the year from the same period of 2022.<\/span><\/p>\n

This kind of freewheeling insider lending is all too common in many Chinese companies, which are often used by their founders as personal piggy banks to lend money to themselves and their associates for purposes that don\u2019t necessarily benefit the company.<\/p>\n

Perhaps the one reassuring element in this story is that Jiumaojiu\u2019s board detected the loan and issued a statement disclosing it, even if that statement came more than half a year after the loan was granted. That means that the company\u2019s board is indeed acting independently of Guan, which is how boards are meant to act. Many Chinese company founders still exercise huge control over their boards, with the result that the founder often puts heavy pressure on the board to keep suspicious actions secret when they are uncovered.<\/p>\n

We should also note that Jiumaojiu landed at the center of a similar controversy about a year ago, when it announced a questionable investment in a mega commercial project in its hometown of Guangzhou. More on that shortly.<\/p>\n

But first we\u2019ll review the details of this latest case of questionable corporate governance involving a loan made by Jiumaojiu\u2019s Pin Xin Yue Gu unit to Guangzhou Yanshang Investment, which is ultimately owned by Guan. That loan carried an annual interest rate of 2.6%, and has now been fully repaid, according to the company\u2019s disclosure last week.<\/p>\n

It said people at the company failed to inform the board of the loan due to \u201ca combination of errors in judgment.\u201d It also pointed out that company officials believed the loan represented a good use of Jiumaojiu\u2019s big cash reserves because it offered \u201can opportunity to utilize part of its idle cash to earn a more favorable interest income than a demand deposit with bank and more flexibility than a fixed deposit with bank.\u201d<\/p>\n

Good governance<\/strong><\/h2>\n

The Hong Kong Stock Exchange was closed on Monday morning for a typhoon, so it wasn\u2019t immediately clear how shareholders might react to the new disclosure. But the reaction was quite negative after the company disclosed a similarly dubious transaction last October that seemed to benefit Guan but wasn\u2019t necessarily that beneficial to Jiumaojiu.<\/p>\n

In that instance, Jiumaojiu disclosed that the company would invest a far larger sum of up to 1 billion yuan for 26% of a company developing the Guangzhou IFC Mall project in Guangzhou, which also happens to be Jiumaojiu\u2019s hometown. At the time Jiumaojiu said it was making the investment because it planned to relocate its headquarters to the mall in the future.<\/p>\n

Perhaps that was really true, but investors didn\u2019t seem to think Jiumaojiu should be making such a big investment in real estate, which is quite far removed from its core restaurant business. Jiumaojiu\u2019s shares tanked by 20% after it disclosed the investment, wiping out about HK$4.6 billion in market value \u2013 far more than the size of the proposed investment.<\/p>\n

Not long after that negative reaction, Jiumaojiu issued another announcement saying it had changed its mind, and that Guan would invest the money personally rather than through his publicly traded company. Such investments actually aren\u2019t uncommon in China, as businesspeople are often pressured by local government officials to assist in local projects, especially when those projects run into financial difficulties.<\/p>\n

But at least in that instance, shareholders used their wallets to express displeasure that their money was being used by Guan for such a purpose.<\/p>\n

This kind of corporate shenanigan certainly isn\u2019t specific to Jiumaojiu, though it has taken a toll on the company\u2019s stock. Jiumaojiu listed in 2020 by selling IPO shares at HK$6.60, and saw them shoot as high as HK$31 the next year as the Tai Er chain\u2019s popularity soared. But the stock has fallen back to earth since then, and is down by more than half this year, closing at HK$10.76 last Friday.<\/p>\n

Those declines have left Jiumaojiu with a forward price-to-earnings (P\/E) ratio of 15, putting it in the middle of the pack among Chinese food and beverage companies \u2013 far different than earlier days when the company was a clear leader. KFC operator Yum China (YUMC; 9987.HK) now trades at a higher forward P\/E of 19, while hot pot chain Haidilao (OTCPK:HDALF) also trades higher at 25. But premium tea shop Nayuki (2150.HK) trades lower at 11, and global giant Restaurant Brands International (QSR) also trades lower at 13.<\/p>\n

At the end of the day, Jiumaojiu still operates one of China\u2019s more successful mid-range restaurant chains with Tai Er, and may have found a new winner with Song Hot Pot to keep its winning streak alive. Some might even commend the company for its transparency about disclosing mistakes when it discovers them. Still, the decline in its share price and P\/E ratios show it may take some time for Jiumaojiu to earn back the big premium it once commanded over its peers.<\/p>\n

Disclosure: None.<\/p>\n

Original Post<\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By Doug Young The board of trendy restaurant operator Jiumaojiu International Holdings Inc. (OTCPK:JIUMF, 9922.HK) thought it smelled something fishy when it recently noticed a suspicious 80.7 million yuan ($11.2 million) loan made in January to a company called Guangzhou Yanshang Investment. 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