‘Sauerkraut Fish’ King Gets Lesson in Fishy Investments

A funny thing happened on the way to construction of one of China’s newest mega-commercial complexes, the Guangzhou IFC Mall in the southern mega-city of Guangzhou.

What started as a typical local corporate chief’s attempt to support the project – using money from the publicly traded company he founded – resulted in a shareholder revolt. But then things took a strange and unexpected turn when, instead of ignoring his shareholders, the chairman of the company actually listened.

This particular tale involves Jiumaojiu International (9922.HK), operator of the popular Tai Er restaurant chain known for its specialty “sauerkraut fish.” But the story – at least the first part of it – could really apply to any of the hundreds of publicly listed Chinese firms whose founders are often also their controlling shareholders.

Such founders frequently treat their companies like personal fiefdoms, sometimes using them to do things that benefit them personally, even if such actions have little or no benefit to their minority shareholders. This particular trait is a big reason why offshore-listed Chinese companies are viewed with suspicion by stock buyers, who essentially realize they are giving up their right to influence management when they invest.

But this latest story shows that perhaps at least some company founders are beginning to realize this kind of practice is unacceptable and irresponsible to the shareholders they are supposed to be serving. It can also be costly, as Jiumaojiu founder and Chairman Guan Yihong quickly discovered.

The story began last week when Jiumaojiu announced it would pay up to 1 billion yuan ($140 million) for 26% of the company developing the Guangzhou IFC Mall project in its hometown of Guangzhou. The company explained it planned to move its headquarters into the complex, pointing out it was necessary to maintain its reputation as a leading-edge and trendy restaurant operator.

But investors didn’t quite see it that way. They expressed their displeasure by selling off Jiumaojiu shares the next day, resulting in a 20% tumble for the stock. That translated to a loss of about HK$4.6 billion ($586 million) in the company’s market value, and a $240 million personal loss for Guan due to his ownership of 41% of Jiumaojiu’s stock. Both figures were far more than the size of the proposed $140 million investment.

Perhaps the personal loss was what made Guan think twice about the decision.

Whatever the reason, the company quickly put out another announcement