INTERNET: Buyers Beware, China Stock Names Aim To Mislead

By newsdoug on May 14, 2015

Bottom line: A new wave of traditional Chinese firms are taking new high-tech names to fool local investors who often buy stocks with little or no knowledge of the companies, and should serve as a warning to foreigners interested in Chinese shares.

Real estate firm renames itself as Pi Tu Pi

An entertaining local media report is poking fun at the latest trend among Chinese companies, which is seeing many adopt high-tech sounding names in a bid to convince unsavvy investors that they are engaged in high-growth industries. But all joking aside, the report also casts a very real spotlight on the dangers of buying Chinese stocks for average international investors, who have been ramping up their purchasing via Hong Kong following the launch last year of the landmark Hong Kong-Shanghai connect program.

As someone living in China who has daily contact with local investors, I can personally say that people here regularly buy stocks with little or no knowledge of what a company actually does or its business prospects. Instead, factors that would be considered unimportant by most western investors, such as names or tips from friends, are often one of the biggest factors driving stock prices.

One such name change is at the heart of a new report in the English-language Shanghai Daily, which notes a recent change that saw local property developer and building materials supplier Shanghai Duolun Industry rename itself as Pi Tu Pi Financial Information Services. (English article) The company announced the change in a filing over the weekend, though it didn’t say why it chose the new name and there was nothing to indicate it was expanding into financial services.

But none of that mattered to local investors, who flocked to the stock when trading began in the new week. As a result the stock soared by its 10 percent daily limit in Monday trade, adding nearly 400 million yuan ($65 million) to its market value. Of course it’s worth pointing out that China’s stock market has embarked on a much bigger rally that has seen the main Shanghai index double since last summer, and that shares also rose by 3 percent on Monday after the central bank cut interest rates over the weekend.

Linguists will note that the name Pi Tu Pi sounds like P2P, which has become a common shorthand in China for popular peer-to-peer lending platforms that allow rich individuals to lend their money to borrowers over the Internet. Such platforms have become a hot ticket over the past year, helping some of the leading players like Jimu Box and Lufax raise tens and even hundreds of millions of dollars in new funding. (previous post)

But in this case it seems unlikely that the newly named Pi Tu Pi even owns such a functioning P2P site, and was simply hoping to make that implication with the name change. The Shanghai Daily report notes that according to its own tally, more than 80 companies on the Shanghai and Shenzhen stock exchange had made recent changes to give themselves high-tech sounding names.

One such case was in the headlines in March, when the nation’s largest maker of fireworks, Panda Fireworks, changed its name to Panda Financial (Shanghai: 600599), prompting the securities regulator to express its concerns over the growing trend. The newly named Pi Tu Pi got a similar query from the Shanghai Stock Exchange, and replied that it has no operations yet on the Internet. The company’s sales slumped 91 percent last year, as it blamed slowing property sales in smaller Chinese cities. But that huge drop was no reason for concern among Chinese stock buyers, who obviously thought the name change was worth $60 million or more based on the Monday price jump.

The moral in all this is that Hong Kong and other foreign investors need to exercise extra care when investing in China-listed stocks via the Hong Kong-Shanghai connect and through a similar connection with the Shenzhen exchange expected to open later this year. Personally speaking, I would never invest in any of these stocks, except for maybe the bluest of the blue chips like the big 4 banks or top energy companies, which are the closest thing China has to stocks that trade based on fundamentals.

One of my friends recently pointed out that my attitude has probably cost me big profits that I could have made from the current rally, much of which has occurred since the Hong Kong-Shanghai connect was launched last fall. That may be true, but I’ll probably also save myself from the big losses that will inevitably occur when this current rally runs out of steam and a big correction begins. In the meantime, anyone who does invest would be wise to look beyond a company’s name, and also keep in mind that Chinese investors aren’t likely to make such basic checks before picking their stocks.