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Zhu's Big News
Working with local attorneys and investment bankers, Richmond consultant Ming Zhu pulled off the first IPO of a small Chinese tech firm in an American stock market.
by Peter Galuszka
In 2004, Ming Zhu had an idea. The Chinese-born business consultant, who had a graduate degree in tourism and business from Virginia Commonwealth University, knew of what seemed a hot business prospect – a Chinese company called e-Future Information Technology Inc. The Beijing firm sells supply-chain software that keeps the merchandise flowing in the world’s biggest and potentially hottest retail markets while accommodating China’s unique accounting system and language.
The company needed money to grow and global attention to enhance its reputation. So, Zhu, who lives in Richmond, contacted Anderson & Strudwick, a local investment house, and law firm Kaufman & Canoles.
Chinese companies. The transaction, which burnishes the Greater Richmond region's reputation as a center of financial innovation, could lead to more business with China.
"The deal wasn't a big one, but it was complex," observes Gene Winter, senior vice president for the Greater Richmond Partnership, a regional economic development marketing organization. "It shows the financial capabilities that exist here. People think of Richmond as a regional financial center but, as demonstrated by the e-Future deal, an increasing number of financiers, attorneys and even CPAs are serving global markets."
Zhu, who travels from his Richmond home to China two or three times a year, knew that e Future’s merchandise- tracking software was gathering big-name U.S. clients such as Proctor & Gamble and a Chinese firm that markets Walt Disney-licensed products. Founded originally in 1997 in the southern province of Hainan, e-Future was growing fast and needed help to move to the next level.
“Initially, they were interested in raising money in China and they tried to find something. But the prospects were very, very limited,” says L. McCarthy Downs III, a senior vice president at Anderson & Strudwick. In 2000, e-Future registered in Beijing and formed a holding company in the Cayman Islands because Chinese security laws do not allow United States citizens to own shares of Chinese companies directly.
Smaller foreign-based firms usually try to go public through reverse mergers into shell companies. But Bradley A. Haneberg, a lawyer specializing in securities law at Kaufman & Canoles, “wanted to do it as the larger companies did,” notes Downs. What better way to get capital and a good reputation than by registering stock in the U.S. and setting up an IPO to launch it? That’s what rising high technology startups typically do in the U.S.
The idea sounded promising, but it was tricky. Launching an IPO in the U.S. usually takes about nine months. The e-Future deal took twice as long. One big problem was the company's size. It was too tiny to attempt the same approach of Chinese behemoths that routinely sell stock on U.S. markets through traditional but expensive American Depository Receipts. Not many, if any, small, $6 million Chinese firms had broached the complex U.S. markets, with its requirements for transparency and corporate governance, let alone through an IPO.
Selling in Shanghai and Shenzhen was nearly impossible because Chinese stock markets have reputations for being ill-regulated and not terribly transparent. What’s more, Chinese market bureaucrats prefer listing stocks of more powerful state-owned companies rather than smaller ones: Getting approval to list any company can take three years. A number of the biggest Chinese companies, such as telecom firm China Mobile Communications Inc. and oil powerhouse CNOOC, list on major exchanges like New York, Hong Kong or Singapore. But markets in Hong Kong and Singapore tend to quietly pour cold water on mainland upstarts.
In the U.S., brokers were skeptical of the IPO and had to be convinced through many meetings and Power Point presentations. Among the issues: e-Future licenses software from third-party Chinese producers. The practice could be risky because Chinese intellectual property laws are in their infancy and the country's regulatory bureaucracy can be capricious and unpredictable.
High-level diplomacy was another factor, given the tension between China and the U.S. over trade issues. Officials at the U.S. Securities & Exchange Commission, which found the firm’s prospectus effective for sale in the U.S., were especially cautious, says Haneberg. The SEC had to consider U.S. economic diplomacy policies which were critical of how Beijing priced the yuan, or Chinese currency. The U.S. business community has long complained that Beijing had pegged the yuan’s price to the dollar in ways that give it an unfair trade advantage.
Moreover, there was an extensive learning curve involving simple cultural differences. Zhu notes that during negotiations, Chinese can be very stiff-lipped, revealing little. Foreign negotiators may assume they have reached certain understandings only to learn they have not.
But Zhu was a mitigating influence, says Downs, whose firm underwrote the offering. “When I was ready to pull my hair out, Ming would say, ‘Don’t worry, Mac, don’t worry. It’s the Chinese way,’” says Downs, who traveled back and forth from Richmond to China to close the deal.
As planning for the IPO continued, Downs hosted e-Future’s top executives at Richmond’s venerable Commonwealth Club. There, in the Old South ambience of the private downtown club, two very different cultures toasted each other.
The deal also was an ice-breaker for Anderson & Strudwick, one of two independent, Richmond-based investment houses that have so far resisted takeovers by huge regional or national banks and investment firms. The company, which was founded in 1948, has offices from Charleston, S.C, to Bethlehem, Pa. Its 180 employees offer services such as asset management, securities brokerage and insurance products. The firm hasn’t really been very involved in global work, although one officer was selected to help the newly-independent Republic of Kazakhstan set up a stock market in the 1990s.
The e-Future IPO finally received the appropriate approvals and launched last Oct. 30. All the hard work seemed to pay off: The stock opened at $6 and climbed within days to $10.65. The tiny company raised some $6.8 million. And it got a moment in the financial limelight when NASDAQ advertised the new stock symbol “EFUT” on a giant Times Square billboard on Halloween.
“EFUT” has done well since. It reached a high of $49.9/share in November and since has settled to the mid $20/share level, weathering the Chinese stock markets’ major downward adjustment in early March. Indeed, with an aftermarket return of 205.32 percent, e-Future was rated the top performing IPO of 2006 by the business blogger “Mr. Wave Theory.”
The company seems well-positioned to grow in a hot market. One reason is that the firm’s exclusive target is the domestic Chinese market, with 1.3 billion potential buyers. Growth in retail activity has grown from 9.2 percent in 2003 to 12.1 percent two years later. Instead of helping Chinese firms export goods that undercut U.S. companies and their workers, e-Future helps U.S. manufacturers sell their goods in China. More than 250 retailers have installed the e-Future system, including Ford, Best Buy and Samsung.
The company is building upon several software platforms it developed in 2000 including ones that let operators visualize product flows at each level, from the factory to the wholesaler, to the store, to the point of sale at a store check out. Newer products can offer data mining services so the operator can get a realistic picture of how products are flowing through the supply chain.
Although e-Future works closely with foreign systems including some from IBM, its primary selling point in China is that it is distinctly Chinese. It accommodates language, indigenous accounting methods and operates 24-hour call centers to handle maintenance.
Many China watchers are banking that a rising domestic middle class that has been forming around coastal cities will eventually grow and expand inward. When that happens, China could become a major import engine instead of just a feared, low-cost exporter. The transformation could create enormous market opportunities for non-Chinese companies, including those in the U.S., Virginia and the Greater Richmond area.
E-Future already operates with distributors in 140 Chinese cities and licenses its products to national chain retailers in 80 Chinese cities, including Beijing SOGO, a department store, and Haier Group, China’s largest household appliance maker. “There are tremendous business opportunities in China,” says Zhu, who has been an official with business consultant RMCC International.
There are some questions, however. Analysts worry that China’s economy may be growing too fast. The Beijing government has tried from time to time to set up market “soft landings” to slow down economic growth and investment fury. Some believe the massive adjustment in stock prices was the result of such tinkering. The Chinese downturn resulted in bearish markets across the globe, including in the U.S. That, in turn, may dampen the enthusiasm for investments, including IPOs.
Nevertheless, Zhu, Downs and Haneberg seem pleasantly surprised by the fast success of their IPO that was hatched in Richmond. Zhu and Downs serve on the board of directors, while Haneburg continues to provide legal counsel. Meanwhile, the telephone has been ringing. In early March, the three were on their way back to China to talk to another Chinese information technology company about launching another IPO.
-- April 2, 2007
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L. McCarthy Downs III, senior vice president, Anderson & Strudwick
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