BEIJING – Haidilao International Holding’s sudden slump after its co-founder sold about US$350 million (S$443.76 million) worth of shares is putting the spotlight on other stocks that may be vulnerable to similar selling.
While the hotpot chain did not give a reason for co-founder Shu Ping’s share disposal, it comes after China moved in late July to tax offshore trusts held by its citizens, closing a loophole wealthy families have used to protect and pass on their fortunes. Owners have a 90-day grace period ending on Oct 22 to settle what they owe without late-payment surcharges.
“Business owners will view the current period as a rare transitional phase, when conditions are likely to be most favorable, giving them an incentive to settle tax obligations sooner rather than later,” said Dong Yizhi, a lawyer at Joint-Win Partners, a Shanghai-based law firm.
That is drawing attention to other founder-controlled companies, including Li Ning, Xiaomi and Sunac China Holdings, where large stakes are held through offshore trust structures, according to data compiled by Bloomberg. There is no indication their founders are planning similar share sales.
The tax issue could add another overhang for Hong Kong stocks, where many major listed companies remain founder-controlled, often with sizable stakes held through offshore trusts. The Hang Seng Index is down about 3 per cent this year, largely missing out on the Artificial Intelligence (AI) hardware boom and dragged lower by sluggish consumption and a lacklustre earnings outlook for its internet companies.
The Haidilao sale stood out because Shu’s husband, Chief Executive Officer Zhang Yong, had bought shares in the company just months earlier at prices more than 20 per cent above where she sold. The stock tumbled 13 per cent in the two days after the latest announcement, hitting its lowest since March 2022.
Haidilao did not immediately respond to a request for comment. It said in a filing that the sale was for the shareholder’s funding needs and would have no impact on its business or financial position.
“If you’re holding Hong Kong stocks, you could do worse than screen for companies where founders control large stakes through offshore trusts, those that have paid out substantial dividends and set up their trusts early on,” said Yang Ruyi, a fund manager at Shanghai Prospect Investment Management.
“As the compliance deadline approaches, those stocks could be more vulnerable to founder-selling and heightened volatility,” she added.
Other firms
Several prominent Hong Kong-listed firms fit that profile.
At Li Ning, Viva Goods – a trust vehicle ultimately controlled by the founder’s family – owns about 19 per cent of the company. The stock has dropped about 9 per cent since the Haidilao announcement, with Morgan Stanley saying the market may have overreacted to concerns that the offshore-trust tax changes could spur selling. Viva has continued buying shares despite the new rules, the bank noted.
Other examples include Guming Holdings, where family-trust vehicle Modern Leaves holds 41 per cent, and Xiaomi, of which Smart Mobile Holdings, an entity controlled by founder Lei Jun, owns 8.9 per cent.
Li Ning, Guming and Xiaomi did not immediately respond to requests for comment on the potential impact of China’s tax changes.
Holding shares through an offshore trust does not mean a founder will sell. Depending on the income and accumulated gains involved, tax bills may be relatively small compared with the wealth of many controlling shareholders, reducing any need to raise cash.
Citigroup analysts including Xiangrong Yu said founder-controlled Chinese companies with offshore ownership structures could nevertheless face a near-term overhang if the tax regime prompts some shareholders to monetize assets, with block trades offering one of the most liquid ways to do so.
Given the prevalence of offshore trusts among founder-controlled Hong Kong firms, some investors see Haidilao’s sale as a potential sign of more to come.
“I think we’ll see more situations like this going forward,” said Chen Da, founder of Dante Research. As China shifts away from land-sale revenue and relies more heavily on taxes, he expects enforcement to tighten. “Many wealthy entrepreneurs are looking over their shoulders right now,” he added. BLOOMBERG
