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 Many Chinese tech executives are betting on higher share valuations
in China where stock markets have recently caught fire. They also
hope to evade any legal mess when Beijing formally outlaws foreign
shareholder control of firms in protected tech sectors.
An exodus of Chinese tech firms would spell the end of a profitable
line of business for Wall Street underwriters. Last year, the $25
billion IPO of e-commerce giant Alibaba - the world's largest
initial public offering ever - generated more than $300 million in
fees.
The numbers are hard to resist. China's tech-driven ChiNext
composite index has gained nearly 180 percent this year, eclipsing
the 30 percent rise in the Nasdaq OMX China Technology Index that
tracks offshore listed mainland firms.
Firms listed on the Nasdaq index get an average share price equal to
11 times their earnings. On ChiNext, they get 133 times. There's a
debate over which ratio is more accurate, but Chinese executives
blame U.S. ignorance of China.
"American investors don't understand the business model of Chinese
gaming companies," said a senior executive of one such firm planning
to eject from New York and move back to a Chinese listing, speaking
on condition of anonymity.
Earlier this year, New York-listed Chinese gaming firms Shanda and
Perfect World said they would go private, while online dating
service Jianyuan.com and medical R&D services provider Wuxi
Pharmatech said they are thinking about it.
Analysts expect dozens of lesser-known companies to follow if they
can, and they see the pipeline of Chinese companies trying to list
in New York drying up.
"The possibility of stirring interest among U.S. investors is slim,"
said Shu Yi, CEO of Beijing-based advertising technology company
Limei Technology, which recently gave up on plans to list in New
York and now is hoping to IPO in Shanghai or Shenzhen.
On Thursday, Chinese Premier Li Keqiang encouraged more of such
companies to return, particularly those with "special ownership
structures," referring to the contractual loopholes employed by many
Chinese firms to evade restrictions on foreign ownership.
China is lining up the finances to assist the repatriation.
Investment bank China Renaissance has teamed up with Citic
Securities to raise funds to help delist and underwrite new listings
in China, while Shengjing Management Consulting has launched a
fund-of-funds that intends to repatriate about 100 Chinese firms.
THING OF THE PAST
That Chinese internet companies would list in the United States
might seem strange, analysts say, but it once made sense.
For one thing, Chinese investors' enthusiasm for startup listings is
relatively recent, whereas U.S. investors have been rewarding
internet startups with high share prices for decades.
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But more important was the fact that Chinese regulators wouldn't let
such firms list in the first place. The China Securities Regulatory
Commission (CSRC) has required any company to be profitable for
several years before listing – a rule which ruled out most Chinese
internet companies.
But Beijing aims to make Shanghai a global financial center on par
with London, Hong Kong and New York by 2020, and it can't do that
without making room for its most innovative companies.
"The obstacle to coming back has been removed," said China
Renaissance in an email to Reuters. "The issue is not whatever
valuation you can get in China. Hot market themes are fleeting."
Profitability requirements are being eased, and there's also a
shortcut: a merger with a Chinese company with a listed shell.
Chinese display advertising giant Focus Media, which bailed out of
New York in 2013, said this week it will relist in China via a $7
billion reverse merger with rubber manufacturer Jiangsu Hongda in
what analysts say is a model for returnees to follow.
BAD CONTRACT
Even if the stock market rally cools, the delisting trend is
expected to continue as Beijing closes a key legal loophole.
Chinese law bans foreign investment in domestic internet firms.
Investors get around the restrictions by buying into variable
interest entities (VIEs) set up by the internet companies, including
Alibaba. U.S. courts recognize that as equivalent to ownership of
the companies.
But now Chinese regulators are revising the foreign investment law.
A draft version of the document published by China's cabinet
explicitly forbids "effective control" by foreigners of a Chinese
company in a prohibited sector.
Paul Gillis, professor of accounting at Peking University, said
there will likely be an exception for VIEs such as Alibaba, which
are wholly controlled by Chinese management, but that offers scant
protection to foreign investors.
"Are you comfortable buying a stock where you really have no say?"
(Additional reporting by Samuel Shen in SHANGHAI; Editing by Nachum
Kaplan and Ryan Woo)
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