Sole Man

Chinese IPO Luster Fades in Frankfurt

Ultrasonic DAX
China's Ultrasonic IPO in Frankfurt in 2011 was a disaster.
  • Why it matters

    Why it matters

    Sports-shoe sole manufacturer Fenghua had a flat footed  IPO on Germany’s stock market last Friday. This was due in some part to the company’s lack of transparent financial data, but also its association with a string of recent scandals involving Chinese firms that went public.

  • Facts


    • Fenghua originally sought to raise €14.4 million, but settled for just €600,000 when the stock went public on Friday.
    • Stock market watchdogs warn potential investors about Fenghua because it’s difficult to get a clear picture of the company’s overall financial health.
    • The company insists it operates transparently and follows strict guidelines.
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Wall Street gets Jack Ma and Alibaba. Germany gets Weijie Lin and his shoe soles.

In the U.S., the Chinese e-commerce company Alibaba launched the largest initial public offering in history this September. Fenghua Sole Tech, the second-largest sports shoe sole manufacturer in China, has followed suit in Frankfurt. Both companies would rather downplay the fact that there is now an embarrassing history of Chinese firms listing in Germany and promptly imploding, costing German investors losing millions in the process.

For example, the chief executive officer of Youbisheng Green Paper, a company traded publicly on the Frankfurt Stock Exchange, disappeared without a trace in July, while the financial chief officer was chased off the plant’s grounds and the company declared bankruptcy. Things were not any better at Ultrasonic, an urban footwear company. The CEO disappeared  – along with all the cash in the company’s coffers – while assuring people by telephone that he was planning to return to the company. There is still no trace of the money. Even when avoiding such spectacular failures, Chinese stocks bring little joy to investors. Most of the stocks on the Frankfurt exchange have been losers.

None of this scares Fenghua.

The company originally sought to raise €14.4 million ($18.27 million), but on Friday offered only €600,000 in stock with 64 percent sold to private investors. Mr. Lin, chief executive officer at Fenghua, wants to use most of the capital raised to add additional capacity to his shoe sole factory. The figures in Fenghua’s IPO prospectus show a healthy €38 million in liquidity while, in the first half of 2014, reported revenues from operations were €11.5 million.

This puzzles Daniel Bauer of the German Association for the Protection of Capital Investors (SdK). Why would Fenghua want to tap fresh capital on the German stock exchange when business is supposedly so profitable? “As a businessman, I would borrow from a Chinese bank to finance growth, instead of going on the stock market miles away,” Mr. Bauer said.

The stock market generally sees the investment banks as being responsible for determining whether a company is ready for an IPO, but most Chinese stocks are funded by second-tier banks that face no great risk to their reputations if an offering fails.

Fenghua says it wants to be in strong financial position when dealing with its customers –  Chinese sports shoe manufacturers. Classic bank financing for medium-sized companies in China remains very rare and many Chinese companies primarily finance themselves, the company added. Being listed on the domestic stock market is difficult because of long waiting times, while being listed abroad polishes the company’s image.

Investors in Fenghua are in interesting company. Other shareholders include companies like Rosy Frontier Investments, headquartered in the British Virgin Islands, and the Maltese company, Commerce Union, which are backed by Chinese investors who stand to profit handsomely after the IPO. These investors are not required to observe a holding period for the bonds. In this way, Fenghua fulfills the rules of the German stock exchange by ensuring sufficient stocks are in free float.

Mr. Bauer of the SdK advises private investors not to invest in Fenghua, noting that it is extremely difficult to get a good picture of the Chinese shoe sole business from Germany.

If this sounds complicated that’s because it is. There’s no reason to believe German stockholders will have much, if any, influence since most shares remain in Mr. Lin’s possession. This means investors are dependent on accurate financial numbers from Fenghua, Mr. Bauer said, pointing to controversies involving Chinese companies including the recent disappearance of the chief executive officer of Ultrasonic, who denies running off with the company’s cash.

Fenghua chafes at any comparison with Ultrasonic.

“The supervisory board controls the business according to strict standards,” a spokesperson said, promising the use of revenues would be “transparently communicated.” Moreover, the recommendations of the corporate governance codes are “largely followed.” And yet the company is using the laxly regulated general standard of the Frankfurt exchange and not the prime standard with stronger transparency regulations.

Even the rules of the Frankfurt’s prime standard segment of the exchange, where most Chinese stocks are listed, have done little to help shareholders to date. Many investors complain that the  German stock market needs to take more responsibility for the companies it accepts for listing.



In 2007, the Frankfurt Stock Exchange set off a virtual fireworks display of public relations to lure Chinese companies to Germany. That’s no longer the case. “We haven’t been proactively soliciting Chinese companies for over a year,” said a German stock market spokesperson.

This doesn’t mean the stock market won’t add more Chinese companies like, for example, Fenghua. “When a company fulfills the prerequisites for a listing, we cannot turn down an application,” the spokesperson said, noting there is a legal obligation for admission.

Mr. Bauer disagrees. “As we see it, the stock market could adapt its rules to prevent such IPOs,” he said. “After all, the stock market has already virtually shutdown whole market segments to prevent fraud.”

The stock market generally sees the investment banks as being responsible for determining whether a company is ready for an IPO, but most Chinese stocks are funded by second-tier banks that face no great risk to their reputations if an offering fails.

Fenghua’s IPO is being coordinated by ACON Actienbank in Munich, which recently brought the Chinese automotive component supplier, JJ Auto, to market. Originally, the car industry supplier sought to raise as much as €16 million, but in the end, collected only about €700,000. Frankfurt just isn’t New York.


Michael Brächer and Susanne Schier are Handelsblatt finance editors on the investment desk in Frankfurt.  To contact the authors:,

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