Chris, you make an excellent point, and indeed Chinese equities generally have lower revenue and earnings multiples than similar American stocks for a variety of reasons.
First is accounting fraud. Lukin Coffee, the example you cite, is just the most recent example of a long list of Chinese companies that had grossly inflated financials. In fact, there are several short seller-focused research firms that have specialized in uncovering these frauds, such as Muddy Waters Research.
Second is political uncertainty. Major Chinese companies such as Baidu have had
entire products shut down overnight by the Chinese government because it violates
some principle of the Chinese Communist Party. In China, the CCP controls everything, so investors are always at the capricious whim of the government.
Third is influence peddling. It’s very common for Chinese companies to enter into real estate
transactions supposedly to buy a new headquarters building or manufacturing plant at grossly inflated prices to curry influence with local governmental agencies and party officials. It’s an obvious way to do business in a country where the government owns all the land. The accounting is above-board since the money changes hands, the it’s not an arms-length transaction, and robs investors who are indirectly paying those inflated prices. As the saying goes, “In America, you get rich so you can go into politics. In China you go into
politics so you can get rich.”
Fourth is the Variable Interest Entity concept. It’s illegal for foreigners (Americans, Europeans) to own shares in a Chinese company. So the way Chinese companies circumvent this restriction is by creating a separate company, typically registered in the Cayman Islands, Bermuda or BVI, that is the publicly traded entity in which foreigners invest. This public entity then has a contract with the Chinese company for 100% of the economic interest in the Chinese company, the Variable Interest Entity. But there have been several cases where the underlying Chinese company’s ownership is suddenly changed, depriving the publicly traded entity of its economic interest. Essentially the company is stolen with very little recourse for the public entity shareholders.
