Back­door list­ing spec­u­la­tors flee

New reg­u­la­tions make such listed com­pa­nies less at­trac­tive as ac­qui­si­tions since they can­not be used for as­set re­struc­tur­ing

China Daily (USA) - - BUSINESS - By CAI XIAO caix­iao@chi­

With tight­en­ing reg­u­la­tion of back­door list­ings, pri­vately-of­fered funds are mov­ing out of their ear­lier in­vest­ments in listed com­pa­nies that were spec­u­lated to be ac­qui­si­tion tar­gets of un­listed firms seek­ing to avoid the lengthy for­mal list­ing process.

China’s se­cu­ri­ties reg­u­la­tor re­leased re­vised reg­u­la­tions on the ma­jor as­set re­struc­tur­ing of listed com­pa­nies in Septem­ber to curb back­door list­ings. The reg­u­la­tor sought pub­lic com­ments on the draft of re­vised reg­u­la­tions from June 17 to July 17.

“The re­vised reg­u­la­tions make spec­u­la­tive back­door list­ingsmuch­more dif­fi­cult, so spec­u­la­tors are cash­ing out from the listed com­pa­nies that­maybe the tar­gets of back­door list­ings,” said Cao Qi­jia, an an­a­lyst at Zero2IPO Group.

Shen Zhou Mu Fund has cashed out from Kelin En­vi­ron­men­tal Pro­tec­tion Equip­ment Inc, the Shen­zhen-listed com­pany’s third quar­ter fi­nan­cial re­port showed in Oc­to­ber. Shen Zhou Mu Fund held 1.2 mil­lion shares of the com­pany three months ago.

China Science and Mer­chants Cap­i­tal Man­age­ment Group sold out their shares of Shen­zhen-list­edMaan­shan Ding­tai Rare Earth& NewMa­te­ri­al­sCoLtd, ac­cord­ing to the state­ment of the com­pany in Au­gust.

Guangzhou-based New Value In­vest­ment Co Ltd sold 125,300 shares of Shen­zhen-listed Hainan Dadong­hai Tourism Cen­tre (Hold­ings) Co Ltd, ac­cord­ing to Dadong­hai’s state­ment in July.

Zhe­jiang Think In­vest­ment Man­age­ment Co sold 1.2 mil­lion shares from Shang­hai-listed YanTai Yuancheng Gold Co Ltd.

Af­ter the stock slump last year, many pri­vately-of­fered funds chose to pur­chase shares of listed com­pa­nies that they thought might be the tar­gets of back­door list­ings. These shell com­pa­nies be­came pop­u­lar in the mar­ket due to the back­door list­ing ex­pec­ta­tion and their share prices rose, so these funds made prof­its.

For in­stance, China Science and Mer­chants Cap­i­tal Man­age­ment Group pur­chased more than 5 per­cent of shares in each of 16 A-share listed com­pa­nies last year af­ter the stock slump. New Value In­vest­ment Co Ltd pur­chased shares of more than 10 listed com­pa­nies at the end of last year. Shen Zhou Mu Fund pur­chased shares in more than 40 shell com­pa­nies in April this year.

“The busi­ness model can­not con­tinue af­ter the China Se­cu­ri­ties Reg­u­la­tory Com­mis­sion re­leased the re­vised reg­u­la­tions on the ma­jor as­set re­struc­tur­ing of listed com­pa­nies,” said an in­vest­ment banker, who de­clined to be named, at a Chi­nese se­cu­ri­ties firm.

the num­ber wait­ing for IPO on the A-share mar­ket as of June 30

Ac­cord­ing to mar­ket in­tel­li­gence providerTonghuashun, about 100 ma­jor as­set re­struc­tur­ing deals of listed com­pa­nies have failed since June.

The re­vised reg­u­la­tions set out five main in­dexes to judge whether an ac­qui­si­tion is in fact a ma­jor as­set re­struc­tur­ing.

Pre­vi­ously, the reg­u­la­tor only looked at whether the as­sets of the un­listed ac­quir­ing com­pany were greater than those of the listed one.

Cao said back­door list­ing is pop­u­lar in China be­cause it is a quicker way to go pub­lic than launch­ing an ini­tial pub­lic of­fer­ing. As of June 30, there­wasa back­log of 894 com­pa­nies wait­ing to IPO on the A-share mar­ket.

Back­door list­ing is also a good way for com­pa­nies listed in the US mar­ket to go back to the Chi­nese cap­i­tal mar­ket.

Yang Feng, found­ing part­ner and chief ex­ec­u­tive of­fi­cer of Shen­zhen-based Blue Ocean Cap­i­tal Group, said ear­lier that back­door list­ing is still the best way for a com­pany to list on the A-share mar­ket, es­pe­cially for those whose mar­ket value is more than 10 bil­lion yuan ($1.5 bil­lion).

“It is much quicker. The cost of a shell com­pany and di­lu­tion of its own eq­uity could prove ac­cept­able for a big com­pany with a mar­ket value of 10 bil­lion yuan.”

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