22 October 2016
In search of higher market valuation, many US-listed Chinese companies are planning a return to the mainland market or list in Hong Kong. Photo: HKEJ
In search of higher market valuation, many US-listed Chinese companies are planning a return to the mainland market or list in Hong Kong. Photo: HKEJ

Why US-listed Chinese companies are heading home

Chinese biotech company 3SBios is seeking up to HK$712 million (US$91.83 million) in an initial public offering.

The stock is scheduled to begin trading on the Hong Kong stock exchange next Thursday.

Interestingly, it’s not the first time 3SBios is going public. The stock had been traded on NASDAQ until it delisted two years ago.

3SBios is not the only company that is beating a path back to China. In fact, many US-listed Chinese companies are planning a return to the mainland market or list in Hong Kong.

Given stringent listing rules in the United States, it’s quite a task for a Chinese company to successfully list there.

But why are these companies giving up their US listing status?

One key reason is the search for higher market valuation.

Chinese firms have complained that foreign investors don’t understand their potential.

Normally, only leaders in certain industries are able to go public overseas. 

An overseas listing is usually not the first thing these companies think of, but a lengthy lockdown of China’s fundraising pipeline forced them to go abroad.

Foreign investors are wary of Chinese companies because many of them have a bad reputation. Some have been involved in accounting fraud.

Even the good ones suffer from poor liquidity and low valuation.

With the A-share market flying high these days, US-listed Chinese firms don’t want to be left out of the rally.

They’re actively looking for a way to return home.

Two weeks ago, China Mobile Games and Entertainment Group Ltd (CMGE.US) announced that a private equity unit under Chinese brokerage firm Orient Securities Co. Ltd had proposed to take the NASDAQ-listed firm private in a deal worth US$673 million, according to a securities filing.

The current market value of CMGE is about US$618 million.

If the deal is successful, CMGE will be the fourth gaming company to delist from the US in the past two years after Shanda Games, Perfect World Co. Ltd. and Giant Interactive Group.

Another example is internet content provider LeShi (also known as LeTV).

The market value of Leshi Internet Information and Technology Corp. (300104.CH) has risen fourfold this year to 143.6 billion yuan (US$23.1 billion).

Meanwhile, Qihoo 360 Technology (QIHO.US) and Youku Tudou Inc. (YOKU:US), the two stars of the mainland’s tech industry, have a combined market valuation of US$12.5 billion, about half that of Leshi.

“US and Europe capitalists do not really understand Chinese enterprises and the stock market,” said Ji Xuefeng, president of Giant Interactive.

“When we have done something and plan for the long-term business, they can’t grasp what we are doing and they seriously undervalue our company.”

Nevertheless, making a comeback into the A-share market is easier said than done.

Companies have to go through a long process including delisting in the US, removing the variable interest entity (VIE) structure which separates the role of ownership and the beneficiaries of a Chinese company, revamping the shareholding structure and waiting to be listed.

Many Chinese enterprises may not have the patience to wait in line; some may look for a shortcut such as a backdoor listing in Hong Kong and China.

If a wave of backdoor listing deals materializes, the stock bonanza is likely to continue.

In fact, Alibaba, the tech giant which had a blockbuster listing in New York in September, is said to be considering the idea.

Alibaba has been active in acquiring Hong Kong companies.

Alibaba Pictures Group (01060.HK) and Alibaba Health Information Technology (00241.HK) are just two of these cases.

The latest move by founder Jack Ma was an investment in ReOrient Group (00376.HK) which has been having a rip-roaring run.

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EJ Insight writer

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