This March is may be the most difficult month yet for beauty product retailer Jumei. With its recent online promotion drawing to a close, CEO Chen Ou has drawn the fury of investors with the company’s sudden decision to return to being privately held.
On February 29, as many as 270 shareholders organized to wield their 10 percent stake in the company and thwart its efforts to go private.
Li Chao, a member of the Jumei Rights Protection Group, is a small investor who holds strong confidence in Chinese companies entering the US stock market. But news of Jumei’s exit cost Li roughly $40,000.
“It’s not my opinion that Jumei shouldn’t go private again, but company really needs to consider the best way to do it,” Li said.
Li’s rage did come out for a reason.
After its poor performance on the US stock exchange, Jumei announced its plan to buy back its shares at $7 per share and complete its transition on February 16.
When the company became listed on the NASDAQ in 2014, its initial public offer was $22 per share.
That significant loss upset many of Jumei’s small investors, who questioned whether the company was manipulating the stock price to complete its buyback at a low cost.
Trade records show that Jumei’s stock price remained above $7 for 97 percent of the past two years. Even during the past 60 days before its return to private holding, Jumei’s average share price was $7.84.
Jumei claimed its share price had averaged $5.53 only 10 trading days before the move.
“Companies don’t normally see such sweeping stock fluctuations immediately before announcing their final share price,” said Wang Fengjuan, a professor at Beijing Technology and Business University. The timing of the buyback was a serious mistake – one that could cost Jumei its credibility if it attempts to get listed on the Chinese stock market in the near future, Wang said.
Jumei has also been criticized for releasing deceptive messages to its investors, encouraging them to hold onto their shares while its value tumbled. Seeing sluggish performance in the stock market in 2014, Jumei released a stock repurchase plan as a positive signal that management remained hopeful about the stock’s prospects. The company never implemented the plan and left investors waiting for the buyback announcement.
Established in 2010 to target the then open market for online cosmetics, Jumei relied on a branding strategy that painted its CEO as a superstar. Its commercials featuring Chen Ou quickly became popular with Chinese audiences and drove shoppers to Jumei.com.
But Jumei’s problems were never hard to spot. Rumors of bad business practices have hounded the company almost since its founding.
In 2014, Jumei was busted for selling counterfeit wristwatches. The company responded by shifting its business structure to emphasize its own stock and strengthening its direct cooperation with brands instead of third-party sellers. The reform did very little to save Jumei’s reputation, and even a year later news of the company selling counterfeit products was common online.
In the third quarter in 2015, Jumei’s financial statement showed its first loss after two years of profit. Since then, the stock plummet never stopped.
“Jumei cannot make big money by selling well-known products. Because of the high cost and high return rate, it seems the vertical e-commerce model doesn’t fit for cosmetics websites,” said Liuyedao, a blogger on Baidu Baijia.
What’s NextBusiness Journal that his group and the Chinese capital management corporation iMeigu have requested investigation from the Security and Exchange Commission (SEC) into Jumei’s buyback. Several investors said they would sue the company in the Cayman Islands, where Jumei is registered, if the SEC investigation does not go smoothly.
“Even if both attempts fail, the investors will try to prevent Jumei from going public again in China,” Zhang said. Jumei has not commented on Zhang’s plans since their public announcement.
Jumei’s poor exit may weaken investor confidence in other Chinese stocks. In 2015, a total of 25 Chinese companies exited the US stock market. “Facing such low-priced buybacks and a lax legal system, it seems quite reasonable that investors may lose faith in Chinese stocks,” says Liu Kejiang, senior partner of Deheng Law Group.
Liu said Jumei’s conduct may further erode investor’s faith.
The ideal final share price for Jumei should have been $8.2, according to Liuyedao’s blog. The final share price needs to be confirmed at a shareholders meeting which is expected to be held sometime during the first quarter.
“It is highly advised for Jumei to keep a positive relationship with its investors if it desires to go back to the China stock market. I really hope the management will increase the final price to an acceptable level so this can be a mutually beneficial outcome for its investors,” said Kuang Jie, a commentator for China National Radio.