Chinese technology companies that raised $7.8 billion from Wall Street investors in initial public offerings during the past 12 years have at least one good reason to delist in New York and take their business to Hong Kong.
Valuations appear to be significantly higher in Hong Kong. Perfect World Co. (PWRD), China’s fourth-biggest online games operator, trades at 3.9 times its estimated earnings in New York, while smaller rival NetDragon Websoft Inc. (777) is valued at 13 times in Hong Kong. Such disparities may push some technology companies to consider moving back east, said Victoria Mio, a senior portfolio manager at Robeco Group in Hong Kong.
More strict oversight by New York regulators and allegations of fraud from short-seller Muddy Waters LLC have suppressed the USX China Index of 174 Chinese stocks trading on Wall Street by 21 percent this year. The gauge trades at 12 times earnings, compared with 20 times for Hong Kong’s Hang Seng Composite Information Technology Index.
“I am tired of the U.S.,” Yang Tianfu, chief executive officer of Harbin Electric Inc., said in a phone interview. “We just couldn’t communicate with the investors.”
‘Overtake’ Wall Street
The Harbin, China-based maker of electric motors delisted from the U.S. last month and can “easily” complete a listing in Hong Kong or Shanghai, Yang said.
Companies wanting to leave Wall Street may choose Hong Kong because listing in Shanghai or Shenzhen would require them to restructure into domestic Chinese firms, said Richard Lim, a Palo Alto, California-based partner at GSR Ventures, which invests in technology companies in China.
China Renaissance Partners, a Beijing-based investment bank that advised New York-listed E-Commerce China Dangdang Inc. (DANG) and NetQin Mobile Inc. (NQ), is working on potential deals that may result in listings in Hong Kong, Chief Executive Officer Bao Fan said. Some involve U.S.-listed companies that may be taken private, he said without naming them.
“Hong Kong, over time, will overtake the U.S. as the preferred place of listing for Chinese technology companies,” Bao said. “In the long term, the core group of holders in these Chinese technology firms will have to be Chinese,” rather than overseas, investors, he said.
In October, Shanghai-based Internet companies Shanda Interactive Entertainment Ltd. and China Real Estate Information Corp. unveiled plans to delist from the U.S. after their shares underperformed Hong Kong-traded rivals. They join 16 other U.S.- listed Chinese companies that announced delisting plans since 2010, according to data from Roth Capital Partners LLC, a Newport Beach, California-based financial firm.
“Some Chinese companies listed in the U.S. that trade at low valuations may consider delisting and go public in Hong Kong,” said Mio, whose fund managed $188 billion of assets, including the Hong Kong-traded stock of Tencent Holdings Ltd. (700), China’s biggest Internet company by revenue, as of September.
Funtalk China Holdings Ltd., a Beijing-based mobile-phone retailer that delisted from New York in August, “won’t rule out” listing in Hong Kong, said Francis Wan, a senior vice president.
NetDragon, based in Fuzhou, southeast China, is also more expensive than New York-listed Chinese online game firms Shanda Games Ltd. (GAME), Changyou.com Ltd. and Giant Interactive Group Inc. (GA), according to Bloomberg data.
Teal Willingham, who represents Beijing-based Perfect World at Christensen International, said the company doesn’t comment on its share price.
Hong Kong Exchanges & Clearing Ltd. (388), operator of Asia’s third-biggest stock market, offers “a perfectly good listing platform” for Chinese technology companies, said Mark Dickens, the exchange’s head of listings. There are plans by investment banks to take some Chinese companies currently traded in New York for listings in Hong Kong, he said.
“We heard investment bankers had been exploring the opportunities,” Dickens said in an interview.
About 100 companies are seeking the exchange’s approval to list their shares or are planning share sales after having received approval, Dickens said at a Nov. 30 forum in Hong Kong.
Focus Media Holding Ltd., a Shanghai-based outdoor advertising company, plunged 40 percent in New York trading on Nov. 21 after a report by Muddy Waters alleged the Chinese firm had overstated its assets.
Spreadtrum Communications Inc., a Chinese chip designer, declined as much as 34 percent in intraday trading on June 28 after the short seller alleged the company had misstated financial results.
The Securities and Exchange Commission sent letters seeking explanation of corporate structures at U.S.-listed Chinese companies, including Shanda Interactive and Kongzhong Corp., said Paul Boltz, a Hong Kong-based partner at Ropes & Gray.
The SEC in June cautioned investors about buying shares in companies formed by reverse mergers, a maneuver used by more than 400 Chinese businesses to gain stock-market listings in North America while avoiding the scrutiny of a public offering.
The buyouts of Chinese companies from stock-market investors in New York, and relisting them in markets offering higher valuations, may generate profit for private-equity investors.
“There is a real interest among private-equity funds in these companies,” said Mark Tobin, co-director of research at Roth Capital. Some U.S.-listed Chinese companies are trading at valuations “far below” those of private companies in China, he said.
Shanda Interactive Chairman Chen Tianqiao’s group, which plans to buy out the company, discussed financing with JPMorgan Chase & Co. (JPM), the company said Oct. 17. PAG Asia Capital, a Hong Kong-based alternative investment manager, helped fund the management-led buyout of Funtalk.
Most of the Chinese companies trying to list in the U.S. are relatively small and are subject to an increasingly difficult regulatory environment, Bao said. Hong Kong also has the benefit of having a sophisticated, international capital market, he said.
“Most of the U.S. investors don’t understand China very well,” Bao said.
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