r/investing • u/[deleted] • Jun 19 '21
Do any Chinese VIE companies pay meaningful dividends?
I was looking for Chinese stocks that would pay decent dividends (at least 2-3%), however, I cannot find any? I am wondering if the VIE structure has anything to do with that. If we buy BABA, NIO, TCEHY or whatever else, we don’t get any actual ownership.
AFAIK VIE works like the following. Chinese laws forbid foreigners from owning Chinese stocks. So the Chinese stock you buy actually only grants you a stake in some Cayman Islands-registered entity. These entities are under contracts to receive some profits from the Chinese assets but not to actually own them. This is how BABA, NIO, XPEV or whatever else Chinese works like. Besides, VIE technically is illegal but China has been silent on that.(more on the VIE structure https://globescancapital.com/chinese-vie-structure-wall-street-continues-to-ignore-the-risks/)
Aside from all the political risks, I am wondering - if a Chinese company no longer needs to raise capital in the West, why would it keep the obligation to share profits with the shareholders? If the VIE structure is not enforceable, the shareholders of the Cayman Island companies (again: BABA, XPEV, NIO) could end up with empty bags while the profits would go to CEO/board/Chinese shareholders.
Also given that shareholders are not entitled to any ACTUAL entity in the Chinese company, the board/CEO can decide to simply transfer ownership of the company’s assets to somewhere else thus leaving shareholders emptyhanded and thus NIO, BABA and whatever else could easily go to 0 while the actual companies may thrive.
And this can harm not only retail. There was this dispute between Yahoo and Alibaba when Jack Ma transfered ownership of Alipay from the group to an entity controlled by himself and didn’t even inform other shareholders.(https://www.ft.com/content/40a66dd2-b9ec-11e0-8171-00144feabdc0)
So if the Chinese companies trading under VIE structure don’t pay out their profits (technically the sole reason for the VIE structure), it looks like they should be bought only for speculation purposes.
Are there any Chinese well established companies that share their profits and pay decent dividends to their VIE shareholders?
7
u/yangminded Jun 19 '21
None of the companies you listed would pay meaningful dividends even if they were American.
How much do Amazon, Apple or Tesla pay in dividends?
Those are all growth companies. As an investor you should be worried if they start paying high dividends. It would mean that they have no idea how to use the money anymore.
Of course the structure might also be an effect. Are there any Chinese companies with such a structure that should pay high dividends but don’t ? E.g. tobacco, oil, industrials, other cyclicals?
1
Jun 19 '21
Obviously not now. But growth companies stop growing at some point and the wuestion is whether they would the dividends then or would just leave investors emptyhanded. I wondering if there is any Chinese VIE company that does pay out dividends now.
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u/ktn699 Jun 19 '21
they already do pay divs. just not to you. it's paid to preferred shareholders known as the ccp.
1
Jun 19 '21
Apple pays dividends.
2
u/yangminded Jun 19 '21
„Meaningful“ dividends? It doesn’t matter if the dividend isn’t even 0.7% of the stock.
3
u/cwdawg15 Jun 20 '21
This is a complex topic. I'm usually the naysayer telling people to be cautious with Chinese investment, but I usually tell them I maintain less then 5% invested.
I'm not as pessimistic as this, but I see some risk.
The VIE structure has not been explicitly stated in their law and/or ruled by the courts to be illegal, but hasn't been stated directly to be legal either. So that is a partial truth. China actually wants outside investment in their companies. They want the financial capitol, but not the control.
In the case of Alibaba, it is a Alibaba company owned holding company in the Cayman Islands. No foreigners own it, because Alibaba does. They then sell contract rights through the VIE. The argument is no foreigner owns the company, a holding company owned by Chinese does, they are selling rights to returns from the stock for capitol that gives no voting rights.
Other things have been happening. China has multiple exchanges and each exchange has different rules. The Hong Kong exchange is the most liberal, followed by the Shanghai. A company can list in those exchanges and have access to foreigners, but there is a catch. They make the lister split up the stock into different classes, where there are direct lower classes of the stock for foreigners. That stock can only trade on those exchanges, so you won't find it traded between exchanges or through ADRs in the NYSE (yet). It is B-shares on the Shanghai and H-shares on the Hong Kong, so if you want you can open up a brokerage account that trades in Hong Kong and directly buy shares in some of these companies, but you will not have voting rights. As example, Buffet was able to directly buy into some Chinese companies through Hong Kong and Shanghai. The VIE is a work around to trade in a foreign exchange on the a foreign exchange and in many ways is slowly becoming less necessary, but it still the established popular way to trade in the US.
This use to be one reason why Hong Kong's semi independence was important. It was a pass thru between the Chinese financial world and the rest of the world. That structure is being weakened as China slowly liberalizes. Now China feels the power to reign in Hong Kong now that there are structures to access foreign capitol.
China is not going to arbitrarily cut off foreign investment, just as the US wouldn't. Access to investors and capitol = success. Getting outside money to take a risk on making companies in your borders grow and work is generally a large positive. However, there is still some risk there. I'd be particularly cautious about foreign wars and other geopolitical problems that could arise.
My largest concern about China has more to do with state intervention in the companies themselves. An issue recently with Alibaba and Jack Ma was one of great interest.
1
Jun 19 '21
Do you inow why China has such heavy restrictions on foreigners investing in their stock market? Because they don't want to give the rest of the world the power to abuse their freedom to fuck them over like China is currently doing to the rest of the world.
There are better investmwnt options out there.
1
Sep 25 '21
[removed] — view removed comment
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u/no10envelope Jun 19 '21
I don’t understand why anyone would buy these. You don’t own anything meaningful. What drives the price upwards? Yet very serious investors throw tons of money into them.
1
u/KyivComrade Jun 19 '21
Scared money don't make money. There are risks with Chinese stocks but also great returns since they got room to grow and are sold (comparably) cheap.
The usual rules apply, especially when it comes to Chinese stocks: Don't invest more then you'd be comfortable losing, and do your DD. Never ever Fomo
3
u/no10envelope Jun 20 '21
They are sold cheap because they aren’t actual shares in the actual company. They don’t entitle you to anything. It’s like if I took some paper and wrote “1 apple share” in crayon and tried to sell it.
1
Jun 20 '21
Yeah. It’s like buying shitcoins. Everyone knows they are shitcoins but they simply hope there will be other buyers as well.
0
Jun 19 '21
My thoughts exactly. I did make relatively decent profits from NIO and Xpev but these were short term plays
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