Translated by Andrew Vanburen from a Chinese-language piece in 21 CN
WHEN A FIRM'S share price plunges into the danger zone, top executives are increasingly on edge.
In such situations, CEOs, executive directors, presidents, VPs and even CFOs might start hinting, albeit indirectly and gradually at first, that perhaps major shareholders in the company – oftentimes first and foremost, the chairman – might just want to consider buying up shares in the firm to pump some good old-fashioned artificial, non-market based value into the company’s lackluster shares.
The primary motivator on the part of management is a desire to hold onto their lucrative positions, with all the associated perks and fringe benefits of course.
But another more altruistic driver is a sincere desire to not leave minority shareholders in the lurch.
And given the fact that a fifth of the value of Chinese shares has disappeared into thin air over the past year is making entreaties by management for a helping hand from top stakeholders increasingly stentorian as share prices continue to diminish.
But not all major shareholders are on board, with some going so far as to not only ignore the appeal to more charitable buying behavior, but actually dumping significant portions of their shares in troubled companies before their original investments become irretrievable.
In short, a quick look across the spectrum of deflated shares in the Chinese capital markets shows ample evidence that management appeals of this nature are virtually falling on deaf ears.
Elec-Tech International Co Ltd (SZA: 002005) has seen shares slide significantly this year, prompting management to reach out to significant shareholders, with CEOs and VPs acting as salesmen of sorts for their own equities.
The major A-share listed exporter of electric motors and household appliances has been hit hard by its dangerous overreliance on the spending habits of Americans and Europeans, who of course are cutting back on their purchases during the ongoing downturns.
But this sob story did little to move major shareholders to action, with the latter instead choosing to cut their losses and quit while they were ahead.
The net result for Elec-Tech?
Targeted shareholders actually sold off nearly 3% of their shares in just one day recently.
On the same day, major shareholders at Zhongchu Development Stock Co Ltd (SHA: 600787) fell for the same sales pitch from executives... and they instead added a fair share of equity purchases to their portfolios.
But one of the more remarkable cases is that of Shenzhen-based automaker BYD Co (SZA: 002594).
The massive selloffs by management of the electric vehicle maker – in which Warren Buffett holds a 10% stake in the firm's Hong Kong-listed shares – caused the carmaker’s A-shares to plummet 28.5% in value during the month of July.
For the market overall, during the troubling month of July, major shareholders of listed Chinese firms (i.e.: those with stakes of at least 5%) – bought 112 million shares worth some 840 million yuan in their own firms.
However, during the same month, this same category of major shareholders sold 321 million of their own shares worth a grand total of over 4.2 billion yuan.
That means that despite the pleas by management, major shareholders sold off a net total of nearly 3.4 billion yuan of their firms’ value back into the market, thus exacerbating the share price falls over the period.
So much for the appeal to charity.
Obviously, in good times and bad, most major shareholders are like any other investor – they act in their own self interests.
The rest of us ordinary, retail investors can only hope their self interest is of the “enlightened” variety.
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