Beijing Media Corp Arrests Hit Investors

BEIJING –October 3, Beijing Media Corp (BMC) confirmed that six of its employees had been detained by Chinese authorities for questioning after Caijing magazine broke the story days earlier. The news saw shares in China's first state-controlled media firm to be listed outside the mainland plunge by 27 percent and sparked a wider crisis in one of the nation’s flagship media conglomerates, the Beijing Youth Daily Group (BYDG).

Three of the employees -- Yu Dagong, head of the advertising department, Zhu Weijing, the deputy head of the department, and Duan Tao, an officer in the department -- were being held on allegations of bribery, the company said in a statement. Vice presidents Zheng Yijun and Niu Ming and advertising department officer Lu Jianning are also being detained but the company said authorities had yet to give a reason. All six employees have been suspended until further notice.

After a one day suspension, trading of Beijing Media Corp shares recommenced on October 4, with the share price falling to an all-time low of HK$9.50 in the morning before steadying at HK$10.45 in late trade, down 19.6 percent from the close of the previous week.

But while the decline in share price is undoubtedly of critical importance to investors, in particular South Africa's largest media company Naspers Ltd, which bought nearly 40 percent of the shares offered last year, giving it 9.9 percent of Beijing Media's stock, the BMC crisis has much wider implications.

BMC was created in 2004 by separating the advertising and sales units of the Beijing Youth Daily newspaper and three other publications in the BYDG from the parent company.  BMC was then listed on the Hong Kong stock exchange as an independent vehicle in December of that year, raising US$116 million through the sale of a 25% interest in the newly formed corporation.

The listing was an important test case of government policy across the media industry at the time, which sought to inject capital into the sector by opening up politically non-sensitive areas such as advertising and sales to foreign and private investment while keeping tight control over content and editorial.

The initial listing was a success and seemed to prove that IPOs for fundamentally attractive players like BYDG and the Guangzhou Daily Group would be of great interest to private and in particular foreign investors who have otherwise limited access to China's major media players.

But the current scandal involving senior personnel at BMC justifiably will have a severe impact on investor confidence when it comes to future listings of state-owned media assets. The fact that the BMC scandal is not without precedent should also serve as a caution to potential investors in state-owned media. Prior to BMC's offering, the corporation was locked in a bitter struggle with an off-shoot of the Guangzhou Daily Group (GZDG) as both entities fought to become the first state-owned media to list publicly. However, the GZDG was forced to abandon its plans after a corruption scandal led to the detention of the group's president and editor-in-chief. Despite ongoing efforts to prepare for a listing no firm date has yet been set.

The current crisis at BMC may also dampen the enthusiasm of those that support more aggressive market reform in the media sector as it becomes obvious that public listings can expose a corporation to enormous risk if its house is not in order and cannot be considered as quick and easy way to bring in much needed cash.

The poor performance of BMC in the six months following its listing should serve as further evidence of this. The first half of 2005 saw BMC net income decline to RMB0.2 million (US$25,000) as compared to a year-earlier when it topped RMB66 million (US$8 million), partially due to more stringent accounting policies following the listing.

In the first half of 2005, BMC also saw advertising revenue decline by 37% year-on-year to RMB233 million (US$28 million) while adspend from all major categories was down significantly, including property (-50 percent), auto (-30 percent) and telecoms (-30 percent).