Slamming the backdoor

New York is losing China stocks

The world has seven species of sea turtle and they are all in decline thanks to pollution, poaching and the loss of their beach-nesting habitat. However, the same cannot be said of China’s corporate sea turtles, or haigui. The term originally referred to overseas returnees who’d left China for study. These days it has more to do with companies which have floated overseas and are now seeking to relist in China.

Their numbers are growing and so are their variations. Focus Media was the first to migrate back to home shores: delisting from the NASDAQ on a buyout offer that was worth $2.7 billion in 2013 and relisting on the Shenzhen Stock Exchange on a valuation of $7.4 billion last September.

Its decision made obvious sense. Many overseas-listed Chinese stocks have been shunned by US investors because their brand names mean nothing to those outside China. A lot of international fund managers remain wary too of corporate governance issues – with many US-listed Chinese companies also a prime target for damaging reports from short-selling research houses such as Muddy Waters (see WiC111).

And why remain unloved and listed overseas when valuations are so much higher back home?

As China’s stock markets started soaring in the spring of 2015, a number of companies set the delisting process in motion. Private equity investment poured in.

According to Bloomberg, 47 companies are at various stages of buyouts totalling $42.6 billion. S&P Capital data shows that Sequoia Capital and Huatai Ruilian are the biggest funders of these take private deals.

Both are among the buyout firms seeking to bring internet security firm Qihoo360 back to China for $9.9 billion, as well as Momo, a dating site, which has been valued at $1.86 billion. Sequoia is also among the firms behind Autohome’s $3.6 billion takeover and Jumei’s $467 million deal.

The problem is the CSRC has maintained a tight control in China’s primary market, with the regulator keen to ensure the volatile A-share market isn’t overwhelmed by a glut of new listings. That means that most corporate sea turtles have to return via a backdoor listing.

As a result, the trend has fuelled brisk speculation among obscure A-shares, on rumours that they might suddenly become the listing shells of promising returnees such as Qihoo360, Giant Interactive or even tech giant Baidu.

However, the CSRC delivered a nasty surprise on May 6 when it confirmed rumours that it is evaluating the practice of corporate haigui bypassing the 800-strong IPO queue by instead seeking out shell companies to engineer backdoor listings. Most US-listed China stocks lost almost a third of their value in a week.

21CN Business Herald says the regulator is concerned retail investors will get burnt, punting on the companies that they view as potential shells.

Wallstreetcn.com says that while larger companies on the CSI 300 Index are trading on a trailing multiple of 20 times earnings, the buying frenzy has pushed the wider CSI 1000 Index to 80 times. Everbright Securities analysis values 51 ‘shell’ stocks at about Rmb3 billion each.

Hexun.com points out the potential hurdles the CSRC is putting in place for returnees. It says regulators now want Qihoo360 shareholders to agree to a six-year lock-up period and refrain from share placements to fund new acquisitions over the same timeframe.

Wei Shanwei of China Renaissance Partners tells Caixin Weekly that investors should not panic. “This isn’t about policy tightening,” he says. “It’s about the CSRC guiding the returnees back in an orderly manner.”

And they are multiplying. In addition to the US sea turtles, Hong Kong is producing its own versions. China’s richest man, Wang Jianlin has announced a $3.9 billion deal to take private Wanda Commercial Properties and relist it on the A-share market, while analysts believe property group Evergrande also wants to switch listings – a process made more complicated because its businesses are incorporated offshore.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.