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China to Mull Curbs on Domestic Backdoor Listing Valuations

Updated on
  • CSRC weighs deal quota for overseas-listed Chinese firms
  • Stock regulator holds discussions with investment banks

China’s stock regulator is considering measures to curb the flow of overseas-traded Chinese companies seeking backdoor listings in the domestic equity market, people with knowledge of the matter said. 

QuickTake China’s Overseas IPOs

The China Securities Regulatory Commission is weighing possible restrictions on reverse mergers, including capping valuation multiples for deals involving companies that previously traded overseas, according to the people. Another option being discussed is introducing a quota to limit the number of reverse mergers each year from companies formerly listed on a foreign bourse, the people said, asking not to be identified as the information is private.

Chinese regulators are concerned the valuations mooted for some domestic backdoor listings are too high and could affect the stability of the stock market, the people said.  The government also wants to avoid encouraging more buyouts that could prompt a wave of fund outflows and increase depreciation pressure on the yuan, the people said.

At least 47 U.S.-traded Chinese companies have received buyout offers totaling $42.6 billion since the start of last year, lured by the prospect of relisting at a higher valuation in Shanghai or Shenzhen, data compiled by Bloomberg show. Any new regulations could affect companies like U.S.-listed security software maker Qihoo 360 Technology Co., whose $9.3 billion buyout is still pending after it signed a definitive deal agreement in December. 

“The A-share market has not stabilized yet, and the government is worried that the return of companies with stronger brand names will suck in a lot of liquidity from smaller companies,” Ronald Wan, chief executive officer of Partners Capital International in Hong Kong, said by phone Tuesday. “They are very cautious and sensitive to anything that will affect stability in the market at the moment.”

Wealth Management

The stock regulator said Friday it’s conducting “in-depth analysis and research” on the impact of Chinese companies seeking to relist domestically after delisting from overseas markets. Speculation in shell companies used for backdoor listings requires attention, CSRC spokesman Zhang Xiaojun said at a briefing in Beijing, without providing further details.

Shares of U.S.-listed Chinese firms tumbled for a third day in New York trading Monday. The Bloomberg China-U.S. Equity Index fell 3.6 percent, the most in three months, taking this year’s decline to 13 percent. 

Any cap on reverse merger valuations would temper investors’ expectations for quick gains from wealth-management products tied to domestic relistings, according to one person with knowledge of the matter. Billionaire Wang Jianlin’s Dalian Wanda Group Co. is guaranteeing a 12 percent annual return to wealthy domestic investors willing to join the proposed buyout of its $29.9 billion commercial property arm listed in Hong Kong. 

Potential changes to rules governing how overseas-traded companies relist on a Chinese exchange are part of a broader discussion among regulators on how to manage all backdoor listings, the people said. The CSRC has held talks with investment banks and other market participants to gauge their views on the potential curbs, the people said.

Volatile Market

China’s securities regulator is still weighing its options and hasn’t decided which of the possible rules will be implemented or when they will be introduced, according to the people. The CSRC didn’t immediately respond to a faxed request for comment.

Outdoor advertising firm Focus Media Holding Ltd. and online game developer Giant Interactive Inc. are among companies that have gained domestic listings through reverse mergers, which can help get around the long waiting list for initial public offerings in China. 

Developer Evergrande Real Estate Group Ltd. has also taken steps to move it closer to potentially switching its stock market listing to China, while Autohome Inc.’s chief executive is leading a group of investors that last month offered $3.6 billion to take the Chinese car website private, data compiled by Bloomberg show.

A restriction on valuation multiples for reverse mergers would be among a number of market distortions introduced by Chinese authorities in their effort to protect individual investors in one of the world’s most volatile equity markets. Nearly all the initial public offerings in China over the past year were done at less than 23 times historical earnings, according to data compiled by Bloomberg.

The CSRC has also signaled a delay in plans to introduce a registration-based system for IPOs, which would end regulatory intervention in pricing and expedite listings. The streamlined rules are unlikely to be implemented this year, which was why Premier Li Keqiang didn’t mention the revamp in his annual work report delivered in March, a person familiar with the situation said at the time.

— With assistance by Jonathan Browning, Vinicy Chan, and Steven Yang

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