China Buyout Spree Resumes as Mainland Bull Market Spurs Deals

  • Two Chinese companies announced privatization buyback offers
  • Tech stocks are relatively cheaper in the U.S. than in China

The return of mainland stocks to a bull market is helping revive the record wave of Chinese companies seeking delistings from U.S. exchanges as investors are drawn by higher onshore valuations.

China Ming Yang Wind Power Group Ltd. and SORL Auto Parts Inc. became the latest companies to receive privatization offers this month after the Shanghai Composite Index rebounded 20 percent from its August low. In the past month, four deals have been announced, pushing the number to an all-time high of 34 this year, totaling $32 billion in offers from existing shareholders to purchase the American depositary receipts of Chinese companies.

The buyback trend, which stalled after a $5 trillion stock market rout in June and a freeze on initial public offerings, is picking up again as investors and executives seek to shift their stock listings from the U.S. to China. Regulators last week said they’ll lift the hold on IPOs by the end of the year as equities bounce back. The buyouts primarily target ADRs of Chinese technology companies because they’re cheap compared with their A-share peers on the mainland.

“We see that the China capital market has recovered a little bit, and also the government will start accepting IPOs again,” Henry Guo, who covers China Internet and media stocks as managing director of Summit Research Partners LLC, said by e-mail. “The situation is better than three, four or five months ago.”

The pace of buyout offers accelerated in the first half of this year as stocks on the Shanghai Composite surged as much as 60 percent and some companies felt compelled to move their equity trading to China, where they saw competitors trade at much higher multiples.

Valuation Gap

Stocks on a Bloomberg index of Chinese ADRs now trade at a median forward price-to-earnings ratio of 17, compared with a multiple of 29 for companies on the mainland equity index. While that’s a narrower valuation gap than in June, it reflects a widening since September as investors return to Chinese assets following an unprecedented state campaign to prop up share prices, along with increased monetary stimulus to combat an economic slowdown.

Some investors worry that the finalization of the deals will be difficult amid concern about the sustainability of the rebound in mainland stocks and as the market volatility reduces the attractiveness of a local listing. E-House China Holdings Ltd., a property consulting firm, cut its June offering price by 10 percent last week. Two of the largest U.S.-listed Chinese companies involved in privatization deals, Momo Inc. and Qihoo 360 Technology Co., are trading at more than a 20 percent discount to their offering prices.

Deal Uncertainty

“All these proposals were made in the summer and now the question is whether it will happen or not, and whether it’s a good idea,” Danton Goei, co-manager of the Davis Global Fund, which invests in stocks worldwide, said by phone. “You just don’t know. There’s a lot of uncertainty. The market’s very skeptical about whether it’s going to happen. I don’t even know if management knows.”

Most of the privatization deals are “non-binding,” giving management teams the freedom to withdraw or lower target prices at will, which Goei called “most troubling.” He currently holds Qihoo and social networking website YY Inc., both pending a delisting, in the $380 million fund he manages. The fund’s almost 15 percent annual return over the past three years has beaten 97 percent of its peers, according to data compiled by Bloomberg.

Takeover bids usually take six to 12 months to finish, according to Summit’s Guo. China Mobile Games & Entertainment Group and Perfect World Co. are the only two companies that have completed the process this year. 

Deal Bandwagon

As long as the U.S. market offers relatively weaker valuations on Chinese companies, then more companies will “hop on the going-private bandwagon,” Ryan Roberts, a Hong Kong-based analyst at MCM Partners, said in an e-mail. 

This year’s going-private deals have on average offered investors a 17 percent premium to the companies’ mean trading prices prior to their announcements, the lowest since 2005, data compiled by Bloomberg show.

“It’s tough to blame an entrepreneur or owners for seeking out the best valuation for their company,” Roberts said. “If the US market is no longer interested, so be it.”

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