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Capital Markets

Chinese stock scandal: US-listed go private

More Chinese companies listed in the US are considering going private as scandals dogging the sector harm their valuations, according to investment bankers working with those companies.

China stock scandals


Chinese companies listed overseas, mainly in the US and Hong Kong, have suffered an increasing number of fraud allegations this year, as the developing industry of funds that publish negative research on these stocks while shorting them finds more targets.

The hardest-hit stocks tend to be smaller companies that went public via the reverse-merger process, in which the Chinese company takes over an already-listed US public shell company.

"One company in my portfolio," says a Shanghai-based fund manager, "is a great business trading at barely three times price/earnings. If it were a private company, I think its value in the portfolio would shoot up immensely – there’s a crisis of credibility attached to overseas-listed Chinese stocks that’s harming the majority of good, legitimate companies."

Seven listed Chinese companies have made privatization announcements since the fourth quarter of 2010, according to research from BNP Paribas. That creates an investment opportunity in itself, says an analyst at the bank, Derrick Sun: "Since there are still uncertainties associated with the [privatization] process, most of them are still trading at deep discounts to their offered price. The average upside to offer prices among the seven is 76.7%.


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