China Re­con­sid­ers the Home­com­ing Party

▶ Buy­outs of Chi­nese com­pa­nies listed in the U.S. lose their al­lure ▶ “Sta­bil­ity and con­trol over the as­set mar­ket is the pri­or­ity”

Bloomberg Businessweek (North America) - - Markets/Finance -

Some Chi­nese com­pa­nies list their stocks on U.S. ex­changes, and to their ex­ec­u­tives, at least, those shares have been look­ing cheap. Man­agers have been lead­ing bids to buy up U.S. shares and take the com­pa­nies pri­vate again. One ad­van­tage of the move is the op­por­tu­nity to even­tu­ally relist the stock in China, where in­vestors might be will­ing to pay a higher val­u­a­tion. The me­dian com­pany on the Shang­hai and Shen­zhen ex­changes is val­ued at a lofty 52 times its trail­ing earn­ings.

Since 2015, more than 40 Chi­nese com­pa­nies with over­seas list­ings have re­ceived buy­out of­fers, for a to­tal of more than $40 bil­lion. But as with many things in the coun­try’s evolv­ing mar­ket econ­omy, things are get­ting com­pli­cated. Chi­nese au­thor­i­ties are sig­nal­ing they are ner­vous about the trans­ac­tions.

First, they went silent on a plan to in­tro­duce a stock ex­change for tech­nol­ogy com­pa­nies, where some of the buy­out tar­gets were ex­pected to find their new Chi­nese home. Then, on May 6, the China Se­cu­ri­ties Reg­u­la­tory Com­mis­sion said it’s study­ing the mar­ket im­pact of such stock relist­ings.

That raised con­cerns that the reg­u­la­tor might curb some relist­ings, re­duc­ing some of the in­cen­tive for buy­outs. Shares of sev­eral U.s.-listed Chi­nese com­pa­nies that had been tar­gets of buy­out of­fers, in­clud­ing 21Vianet Group, YY, and Momo, dropped sharply. Qi­hoo 360 Tech­nol­ogy de­clined as well, even though the In­ter­net se­cu­rity com­pany’s $9 bil­lion buy­out has been ap­proved by its share­hold­ers. A com­pany spokesman says the pri­va­ti­za­tion re­mains on track.

Buy­out groups “did the math to cal­cu­late the val­u­a­tion, and the num­bers worked,” says Jun Zhang, head of China re­search at Rosen­blatt Se­cu­ri­ties in San Fran­cisco. But they didn’t ex­pect Chi­nese poli­cies to change so quickly— and nei­ther did in­vestors who bought the stocks as­sum­ing a buy­out was com­ing. “No­body did,” says Zhang.

Reg­u­la­tors may have been con­cerned about a spec­u­la­tive frenzy that was build­ing for shares in some small com­pa­nies al­ready traded in China. The com­pa­nies are con­sid­ered tar­gets for so-called re­v­erse merg­ers—a com­pany that wants to go public can buy them to get a place on the Shang­hai or Shen­zhen ex­change, as an al­ter­na­tive to the more cum­ber­some process of an ini­tial public of­fer­ing. There could also be con­cern that the mar­ket is too shaky to ab­sorb an in­flux of com­pa­nies. The Shang­hai Com­pos­ite In­dex has de­clined 21 per­cent this year.

“I don’t nec­es­sar­ily think it’s a bad

thing,” says Ryan Roberts, a Hong Kong­based an­a­lyst at MCM Part­ners, of the slow­down in buy­outs and relist­ings. “Hav­ing a bunch of IPOS com­ing all to­gether with less scru­tiny will be more prob­lem­atic than the cur­rent sit­u­a­tion.”

Pol­i­cy­mak­ers may also be con­cerned that the buy­outs con­trib­ute to an out­flow of cap­i­tal when they are fight­ing to main­tain a sta­ble ex­change rate be­tween the yuan and the U.S. dol­lar.

The about-face un­der­scores the lack of con­sis­tency in China’s mar­ket reg­u­la­tion. Only a year ago, Premier Li Ke­qiang pub­licly en­cour­aged over­seas-listed com­pa­nies to re­turn to lo­cal ex­changes, a key part of the gov­ern­ment’s strat­egy to trans­form the econ­omy via tech­nol­ogy and in­no­va­tion. Now, for au­thor­i­ties, “sta­bil­ity and con­trol over the as­set mar­ket is the pri­or­ity,” says Jun­heng Li, founder of JL War­ren Cap­i­tal, a New York-based re­search firm fo­cused on Chi­nese eq­ui­ties.

Still, reg­u­la­tors may not block all the deals. In­stead, they could cap val­u­a­tion mul­ti­ples for re­v­erse merg­ers with com­pa­nies that had traded abroad, ac­cord­ing to peo­ple fa­mil­iar with the sit­u­a­tion. Or reg­u­la­tors could es­tab­lish a quota lim­it­ing the num­ber of such deals.

Liang Jian, chief ex­ec­u­tive of­fi­cer of Imeigu Cap­i­tal Man­age­ment, says he thinks most of these deals will even­tu­ally go through. His hedge fund some­times in­vests in buy­out tar­gets and in one case has put to­gether a ri­val bid for a com­pany man­age­ment is try­ing to buy. Liang says ex­ec­u­tives have al­ready in­vested time and money in their buy­out plans, and they know that even af­ter go­ing pri­vate, it takes a while to relist on China’s ex­changes. The pol­i­tics could change again in the mean­time.

But one thing is clear by now. “The im­pres­sion that you can go and relist in China for a for­tune was mis­lead­ing,” says Patrick Cho­vanec, New York­based chief strate­gist at Sil­ver­crest As­set Man­age­ment Group. “When you glance at the China mar­ket and say it’s more at­trac­tive than the U.S., the dan­ger is, how long will it last?” �Bon­nie Cao and Ye Xie

The bot­tom line China’s pol­i­cy­mak­ers have got­ten ner­vous about a wave of com­pa­nies seek­ing lo­cal stock list­ings. That’s given in­vestors whiplash.

Newspapers in English

Newspapers from Canada

© PressReader. All rights reserved.