Equity markets: A whole new bourse game
More Chinese companies repatriate; Shanda Interactive ‘to list subsidiary’
Shanda Interactive’s shareholders did more than pave the way for the privatization of one of China’s leading web-and-gaming companies when they voted overwhelmingly on February 16 to back a $750 million management buyout – they also marked the end of an era.
For more than a decade, China’s tech titans made pilgrimages to New York, in search of capital, credibility and – through Nasdaq stock listings – a critical mass of knowledgeable investors.
Now, disillusioned by soggy valuations and tighter US regulations, many are considering making the trek home, delisting from New York and relisting in Hong Kong or Shanghai – bourses that guarantee higher valuations, bustling retail-investor communities and light-touch regulators.
Analysts point to a long-term process of repatriation – one implicitly encouraged by authorities in Beijing – as Chinese companies opt to return to the mainland, with others choosing never to leave home in the first place.
"This is part of a general and ongoing trend," says Dick Wei, a technology analyst at JPMorgan Chase in Hong Kong. "Valuations in China and Hong Kong are higher. And as far as listing requirements go, they are far less vigorous in Hong Kong or the mainland than [they are in] the US."
Then there is the sheer amount of capital within the mainland. China is not yet as wealthy as the US, but its population boasts a large savings pool desperate to invest in solid, reliable blue chips – and in the People’s Republic, former US-listed big tech firms are as close as you get to corporate royalty.
David Wolf, Wolf Group Asia
"This market [the process of delisting in the US and relisting in China] is being driven by China’s huge savings pool," says David Wolf, president and CEO of Beijing-based corporate consultancy Wolf Group Asia. "There’s more than enough capital in the mainland market to support some big IPOs by China’s leading tech entrepreneurs. This is a process that has only just begun." The news is worrying for executives at Nasdaq and NYSE Euronext, owners of the New York Stock Exchange. At the end of 2011, 174 Chinese stocks were listed in the US, represented by the USX China Index. This roster includes internet firms NetEase and Sohu, and search website Baidu, all of which turned their founders into overnight billionaires after New York listings.
Yet some US investors might not miss an outflow of China stocks. Jialong Shi, a tech analyst at CLSA in Hong Kong, says US investors, burnt by profits warnings and ropey governance, "tend to price in a discount on Chinese companies".
Statistics appear to bear this out. The USX China Index is trading at around 12 times earnings, compared with 20 times for Hong Kong’s Hang Seng Composite Information Technology Index.
And looking at the valuations of single stocks, Perfect World, China’s fourth-largest online gaming firm, trades at around 4.5 times its estimated earnings in New York, while its smaller rival, NetDragon Websoft, is trading at just shy of 60 times earnings in Hong Kong. Such valuations, analysts says, give tech firms greater impetus to relocate back home.
Many believe a trickle from west to east could become a flood. And it’s not just tech firms seeking to return home. Sixteen mainland corporates have announced plans to delist from the US since 2010, including Funtalk China Holdings, which delisted from the NYSE in August, and property data provider China Real Estate Information. Funtalk’s senior vice-president, Francis Wan, subsequently refused to rule out a relisting in Shanghai or Hong Kong.
Analysts highlight several Chinese tech firms frustrated by their own rock-bottom valuations. "I’d look at [online game developers] Changyou and Giant Interactive Group," says one Hong Kong-based analyst, who declined to be named. "Those are the [type of] companies that would benefit from [relisting in] China."
Another points to Ninetowns Internet Technology, an online provider of international trade solutions. Changyou, as of February 21, was trading at 5.5 times estimated earnings, with Giant trading at 7.1 times and Ninetowns at just shy of 13 times.
Most mainland firms depart the scene quietly and with a modicum of grace, but not all. Harbin Electric chief executive Yang Tianfu, after delisting his firm from the NYSE in November, said he was "tired of the US", and he could "easily" complete a listing in Shanghai or Hong Kong. US short-sellers, including Citron Research, had alleged the firm was being run fraudulently; Yang, in turn, complained he "couldn’t communicate with investors".
Not all corporates will simply swap one stock market for another. Shanda Interactive, for instance, is likely to follow a more nuanced route. Since Beijing bans Chinese firms from having dual mainland listings at group and subsidiary level, Shanda Interactive co-founder Chen Tianqiao is expected to pursue the listing of one or more of his subsidiaries.
This could include web-based gaming firm Aurora, or Cloudary, an online literary platform, which has flirted with its own New York listing. (Shanda Interactive also owns 72% of another Nasdaq-listed subsidiary, Shanda Games.) This, notes CLSA’s Shi, will leave Chen free to complete a mainland listing of Shanda Interactive at a later date.
Either way, this is a process that has just started. When 87.3% of Shanda Interactive’s shareholders voted on February 16 to escape from New York, one era ended and another began.
Chinese entrepreneurs might still list shares in New York, to keep their fortunes far from Beijing’s prying eyes, but the Big Apple is no longer the promised land it once was.