Investors Steer Clear of Chinese IPOs in US

The value of Chinese companies delisting from U.S. exchanges in 2011 exceeded the amount Chinese companies raised via initial public offerings in the U.S., a stark sign of how high-profile fraud allegations and slowing growth have made many foreign investors bearish on Chinese groups.


Chinese companies with a combined equity value of $3.5 billion were taken private in 2011 by management, strategic buyers and private equity groups, according to data compiled by Roth Capital Partners, a California-based advisory firm. A further $4.3 billion of potential deals remain in progress. In 2010, almost no such deals were completed, according to Roth.

In contrast, Chinese companies raised only $2.2 billion through IPOs, about half what they raised in 2010, according to Dealogic and Thomson Reuters. No Chinese companies made it to market in the fourth quarter. According to Dealogic, $41.9 billion was raised in total on U.S. exchanges last year, down from $44.5 billion in 2010.

Share prices of U.S.-listed Chinese companies tumbled last year amid concerns about the sustainability of China’s growth and allegations of accounting fraud at some Chinese companies listed overseas. Sino-Forest, for example, was suspended by the Canadian regulators after being accused by shortseller Muddy Waters of accounting fraud, which it denied.

The USX China Index, which tracks U.S.-listed companies that derive most of their revenue from China, fell 27 per cent in 2011.

For management teams and some private equity groups, the falls created opportunities to buy out companies in order to build them up with private funds and then relist them, potentially in Hong Kong or the mainland where Chinese groups typically command higher valuations than in the US, according to bankers who have worked on some of the transactions.

“The chairman or founders of these companies saw their listed vehicles falling 70 to 80 per cent in value [in the U.S.] so they said, ‘Why am I listed?’”, said one banker who has worked on some take-private deals. “The cost of being listed versus the benefit of being there is hard to justify.”

One of the most high-profile deals was the $750 million buy-out of Harbin Electric, an electric motor maker, by the chief executive, backed by Abax Global Capital, a Hong Kong-based fund. The company had been accused of fraud by a shortseller, which it denied. Its stock on Nasdaq fell below $6 before shareholders accepted the chief executive’s offer of $24 a share.

These buy-outs are in addition to a handful of delistings by Chinese companies forced off U.S. exchanges for violating regulations, such as failing to file financial reports.

However, the pace of dealmaking could slow as sharp fourth-quarter falls in Hong Kong and mainland exchanges reminded investors that being able eventually to relist in Asia at a higher valuation is not always a given, said Mark Tobin, co-director of research at Roth.