Caixin
Feb 10, 2017 03:08 PM
BUSINESS & TECH

Wall Street’s China Love Affair Ends in Frustration

Illustration: Hao Ye
Illustration: Hao Ye

(Beijing) – A checkered relationship that began as a love affair between U.S. investors and Chinese stocks, only to later turn sour, is quickly moving into the realm of divorce due to irreconcilable differences between a culturally mismatched pair.

Observers who have watched the relationship evolve cite a number of factors for the breakdown, led by lack of interest in many smaller firms and broader mistrust from Western investors who got burned in a series of accounting scandals. But they also point out that Wall Street will continue to attract a limited number of Chinese companies going forward, most notably those with global aspirations.

The story of Chinese companies’ early love affair with Wall Street has as many roots in China as it does across the Pacific in the U.S. Leading that list was Beijing’s indifference to IPOs by nearly all private companies as recently as 2010, as big state-run firms took a front seat in a system that favored companies with strong government ties.

But a warming climate at home toward these more dynamic, venture-funded firms has made many think twice about listing offshore, especially as they eye valuations that are often many times higher on Chinese markets versus comparable listings in the U.S.

privatization chart1


“If you look at today, there are still some reasons to push companies to go to the U.S.,” said Gary Dvorchak, Asia director at BlueShirt Group, an investor relations adviser for U.S.-listed Chinese companies. A lingering major deterrent to listings in China is long waiting times to make IPOs at home due to a big backlog in the highly controlled system, he said.

“There are also sectors that are better suited to offshore listings because they’re understood in the U.S.,” he added. “Technology is one in particular, and also specialty sectors like biotech. Another reason for listing offshore is for companies who have global ambitions and want to build up their brands, build up market recognition.”

Birth in a Bubble

The complex trans-Pacific relationship dates back to the dot-com bubble of the late 1990s, when China’s earliest Internet trio of Sina Corp., Sohu.com Inc. and NetEase Inc. made Nasdaq listings when the Chinese web was still in its infancy. Dozens of major IPOs and many more smaller ones took place in the first decade of the 21st century as the love affair blossomed on investor bullishness about China.

But a slow-motion divorce that started as early as 2012 shifted into high gear over the last two years as Chinese companies started abandoning New York in droves with a wave of privatization offers. That wave saw about three dozen companies ultimately launch privatization bids over an 18-month period starting in early 2015, most with an ultimate aim of relisting in China at substantially higher valuations.

The frenzy peaked in June 2015, when 13 companies launched such bids during the month, according to a survey by Caixin of 33 such offers during the wave. The largest saw New York-listed software security specialist Qihoo 360 pull off a privatization worth nearly $10 billion in August.

The mutual disenchantment began with a series of accounting scandals starting in 2011, when a company called Longtop Financial was exposed for its misleading and potentially illegal accounting. The crisis that followed peaked in 2013 with a similar scandal at solar-panel maker Suntech Power Holdings Co. Ltd., whose aggressive accounting ultimately bankrupted a company that was once worth as much as $16 billion.

Bubbling Back to China

As a confidence crisis sent U.S. share prices tumbling, trends were moving in the opposite direction in China, where the main Shanghai index staged a remarkable rally that saw it more than double between November 2014 and June 2015.

“The argument for delisting was, ‘I can get two, three, four times the valuation in China that I got in the U.S.’,” said Rene Vanguestaine, CEO of Christensen Investor Relations, which also provides services for U.S.-listed Chinese firms. “But assuming you had to wait for two to three years to re-emerge on the other side, there was no way to predict where the valuations would be,” he added, explaining his own skepticism about the privatization wave.

One of the earliest companies to come home was outdoor advertising specialist Focus Media, which launched its privatization in 2012 and last year completed a relisting in China. Worth just $4 billion when it privatized based on its last New York trading price, the company is now worth more than four times that amount, or about 120 billion yuan ($17.5 billion), in its new home on the Shenzhen Stock Exchange.

privatization chart 2


But the homecoming hasn’t been all smooth sailing. Of the 32 bids launched during the 18-month buyout wave, shares of 14 of the companies — or nearly half — were still trading in New York at the end of January, according to a Caixin analysis. And among companies to actually delist, only a handful have managed to relist in China due to a obstacles put up by a wary securities regulator.

Of those whose privatization bids that failed or remain unconsummated, only one, social-networking app operator Momo, was currently trading at a share price significantly higher than its original buyout offer. By comparison, many other stocks were down sharply, led by a 70% decline for data center operator 21Vianet, even as the broader S&P 500 has risen 9% between the June 2015 buyout peak and the present.

The big price gaps for some companies whose buyouts remain unconsummated reflects investor skepticism, partly because so many were announced around the same time, said Peter Halesworth, managing partner, Heng Ren Investments, an asset manager with a focus on U.S.-listed Chinese companies. He added that the one-third failure rate is roughly normal for such deals.

“I believe circumstances unique to China, like cross-border financing, capital controls, and issues around relisting in Chinese markets have presented some unique hurdles,” he said. “Also, many of the buyouts are being proposed at laughably low prices and experiencing intense pushback from investors in the U.S. and from China. We still believe there are deals to finalize, but they take longer due to these circumstances.”

Higher Profile, Greater Stability in New York

At the end of the day, most observers agreed the relationship between Chinese stocks and Wall Street will never be the same again. As one of the earliest groups to come to New York, high-tech Chinese firms could be one exception that continues to favor Wall Street due to a relatively strong appetite and deeper understand for such companies among global investors.

That fact was on prominent display in 2014, when e-commerce giant Alibaba Group Holding Ltd. raised a record $25 billion in an IPO on the New York Stock Exchange. But even in that instance, the shares now trade just 47% above their IPO price nearly two and a half years later, a respectable gain but nothing like the huge jumps that companies used to get.

The U.S. should remain attractive for particular kinds of companies going forward, especially ones that have global aspirations and like the greater stability and depth of global financial markets, observers said.

“Do it because you want to be an international company that wants to partner with institutional and public investors for stable and consistent financing,” said Heng Ren’s Halesworth. “Not because it's a vanity project of the chairman, or a financing scheme to sell high to international investors using a dubious business plan under the guise of China treasure. … Companies are stigmatizing themselves and Chinese companies by doing this.”

Contact reporter Yang Ge (geyang@caixin.com)


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