There are 2,090 companies listed on Hong Kong’s stock exchange but not all of them are classed as investment-worthy. Several hundred have been thinly traded for years or seen their core business cease trading altogether.
A firm on the exchange still needs to prepare its financial statements and meet regulatory requirements. These expenses can easily cost $1 million a year. So what’s the point in maintaining listed status?
One answer, according to Oriental Daily, is that the so-called “shell price” of listed firms on Hong Kong’s main board is up 20% over the past year to roughly $100 million. This implies that shareholders can pocket a tidy profit simply by selling their shell to a third party seeking a backdoor listing.
The demand for shells in Hong Kong has been driven up by mainland companies, who have found it difficult to find their way into China’s primary market because of the cautious approach adopted by the China Securities Regulatory Commission (CSRC). At the end of last month, there were 560 candidates waiting to go public on China’s own bourses. In addition since May last year the CSRC has been refusing permission for backdoor listings in Shanghai and Shenzhen while it works on new rules to delist “zombie” firms, aka those with no meaningful business or stock market turnover (see WiC325).
The CSRC’s approach has disrupted the plans of several large corporations desperate for A-share homecomings. Companies which have already invested heavily to take private their overseas shares are particularly effected. For instance, Wanda Group took its commercial property unit private in Hong Kong for about $4 billion in early 2016 (see WiC320) but its A-share listing application is still unresolved.
Qihoo 360 found itself in the same position after the antivirus software provider delisted from NASDAQ last year, following a buyout valued at $9.3 billion. But this month there was better news when the company signalled that it was close to a backdoor debut in Shanghai. In a filing on the Shanghai Stock Exchange, SJEC Corp, an elevator maker that has been suspended from trading since June, said it will buy Qihoo for Rmb50 billion ($7.6 billion) by issuing new shares. Following the reverse takeover, Qihoo’s chairman and founder Zhou Hongyi will hold more than 50% in SJEC.
At the end of 2016, SJEC’s assets amounted to Rmb281 million. When Qihoo’s backdoor listing is completed, it will be transformed into a software giant that controls 95% of China’s anti-virus software market for personal computers, and 67% for mobile devices.
The regulator appears to have softened its stance. “The CSRC will support good Chinese companies returning to the domestic market, for mergers and restructurings,” Gao Li, its spokesperson told reporters in Beijing.
Qihoo still needs final approval for the deal to go ahead, although Zhou is confident his company will get a warm welcome because it is returning home to “defend its country”, as he puts it.
“Cybersecurity is a very special industry. No matter if it’s Chinese or Russian or American, as long as a cyber security firm grows big enough, it needs to be aligned with national interests,” he told reporters in Shanghai last week.
Pi Haizhou, a stock market commentator, agrees that Qihoo’s experience makes it a special case and says it doesn’t mean other prospective A-share returnees such as Wanda, Guangzhou R&F and China Evergrande (see this week’s Property story for the developer’s A-share listing plan) will get the green light.
“It is not ideal that Qihoo is listed overseas on national security concerns,” he wrote in Oriental Daily. “Regarding the A-share return of [other] overseas-listed Chinese firms, the CSRC has not left the door wide open yet, especially for those who are just seeking a richer valuation in the Chinese market.”
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