Markets

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

The U.S. has long been the place where China sent its fledgling companies to test publicly traded waters, leaving its domestic bourses, outside the volatile ChiNext, for staid and oftentimes state-backed firms.

Last year, however, marked something of a shift. Against the backdrop of tumultuous Chinese markets, many U.S.-listed corporates from the mainland -- think security software developer Qihoo 360, Mindray Medical International and iKang Healthcare Group -- embarked on a delisting rush, aiming to go public back home, where valuations were higher.

Different Paths
Chinese and U.S. stocks varied in performance in 2015
Source: Bloomberg

In 2016, investors might have been expecting to see more of the same. Some 40 Chinese companies have announced plans (which admittedly aren't binding, more on that later), to withdraw from U.S. public markets, and relist in China. But here are two reasons why those and any future buyouts may be misguided.

One has to do with valuations. Despite the 9.4 percent gain in Chinese stocks last year, valuations of Chinese companies are now higher in the U.S. than they are domestically, even though the Bank of New York Mellon China ADR Index, which tracks about 30 Chinese corporates, slipped 6.5 percent over the same period.

The median price-to-earnings multiple of U.S.-publicly traded Chinese companies with market valuations of more than $100 million sits at a healthy 26.9, Bloomberg data show, compared with a price-to-earnings of 17.4 for the Shanghai Stock Exchange Composite Index.

The second reason is once delisted, Chinese companies are going to have their work cut out getting domestic listing approval from the China Securities Regulatory Commission, which, let's face it, has something of a history opening and closing the IPO door willy-nilly.

Saying Farewell
U.S.-listed Chinese companies with pending "go-private" deals.
Source: Bloomberg

There are almost 700 companies waiting for CSRC sign-off and while the regulator does plan to step back from its gatekeeper role, there aren't many who believe securing a share-sale slot for non-state firms will become much easier anytime soon. That's why the modus operandi of previous U.S. delistings has been a reverse merger. Advertising outfit Focus Media, which used to be listed on the Nasdaq, was taken private three years ago by a Carlyle Group-led bunch of investors and its founder for nearly $4 billion. A reverse merger last year valued it at $7.2 billion.

(Fortunately for those Chinese take-private deals that are pending, most offers aren't binding so if high valuations make deals no longer viable, they can always be dropped.)

Meanwhile, there's a growing wave of Chinese companies looking to go the other way, a path they broadly deserted last year.

Coming off a 2014 that saw Alibaba raise a record $25 billion in its New York Stock Exchange listing, 2015 was a very quiet 12 months for Chinese companies going public in North America. Among this year's candidates are peer-to-peer lender Lufax, recently renamed Lu.com, and Alibaba's online payments affiliate, Ant Financial. 

Their challenge could be a more global one, as the world's love affair with so-called fintech firms cools. Already two of the Chinese technology companies that went public last year, Baozun and Yirendai, are trading below their initial share sale price.

It's a salient lesson, so early on in the piece. But considering the valuation differences and China's stop-start IPO market, those Chinese companies currently in the U.S. may find staying put their best option.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net