Private Time

by+Zi+Mo

On July 9， 2015， Chinese e- commerce giant Dangdang Inc.， which was hailed as“Chinas Amazon” as it was listed on the New York Stock Exchange five years ago， announced that it had received a buyout offer from its chair and CEO， becoming the latest in a series of U.S.-listed Chinese companies to go back to private.

The same day， the NASDAQ-listed Chinese video streaming website operator YY Inc. also announced it was going private. The trend of overseas public Chinese firms returning to the domestic equity market through privatization has many scratching their heads.

Privatization Wave

Just a couple of years ago， many Chinese tech companies sought to go public overseas. This summer， however， a number of overseas listed Chinese firms have chosen to come back home through privatization. Privatization occurs when a single entity， usually the management， buys all shares of a publicly traded company， returning it to private ownership.

According to figures from financial data provider Dealogic， in June 2015 alone， a total of 15 U.S.-listed Chinese firms including Qihoo 360 and Momo Inc. received privatization offers with total values of US$ 22.6 billion – twice the total market value of all Chinese companies previously delisted from the U.S. stock market.

Some believe that the wave of privatization was triggered by the success of Beijing Baofeng Technology Co.， Ltd.， a leading Chinese internet video provider. On March 24， 2015， the once U.S.-listed company returned to Chinas A-share market after completing privatization. That day， its share price rocketed from 9.43 to 10.28 yuan， hitting the 10-percent daily limit. At the time， its total market value measured only 1.2 billion yuan. After 39 days of rising to the daily limit， its share price reached 300 yuan， and its market value exceeded 36.9 billion yuan.

Chinese advertising company Focus Media， which left the NASDAQ two years ago amidst an assault by short sellers， recently returned to the Chinese stock market via what is known as a reverse merger. The buyout of Focus Media cost its CEO Jiang Nanchun and the Carlyle Group US$ 3.7 billion， but the company was appraised at US$ 7.3 billion in the reserve merger， almost double its actual market value at the moment of privatization.

“The high valuation of Chinas A-share market is one significant factor behind the wave of returning overseas listed Chinese companies，” opines Wu Xiaohui， A-share unit leader of Deloitte Chinas public offering team. “Moreover， the business modes of many Chinese firms are not widely recognized by overseas investors， which makes them vulnerable to short selling. Chinas stock market reform， especially the pending strategic emerging industry board， will also facilitate the relisting of returned Chinese firms in China.”

Road Home

In the beginning， most Chinese internet companies were foreign-funded， barring them from obtaining ICP （internet content provider） licenses. For financing needs， many Chinese internet firms went public abroad as variable interest entities （VIEs）. Chinese internet giants including Sina， NetEase， Sohu， Baidu， and Ctrip were all listed in the U.S. or Hong Kong as VIEs.

As the Chinese capital market continues on an upward path， many U.S.-listed Chinese firms are becoming undervalued. Zhou Hongyi， chairman of Qihoo 360， remarks that the current US$ 8 billion market value of Qihoo 360 in the U.S. stock market does not reflect the companys real value. In this context， many U.S.-listed Chinese firms are willing to abandon VIE structure and return to the A-share market in hopes of repeating the miracle created by Baofeng Technology.

However， the road home isnt necessarily smooth. They must retreat from the U.S. market through privatization， remove VIE structure， and finally get relisted in the A-share market through IPOs or reverse mergers. The lengthy process is sated with uncertainty and risk. Removing VIE structure alone usually takes a year and a half. When the process is finally complete， there are not guarantees that the A-share market will still be on the up and up. To further complicate matters， many overseas listed Chinese firms were organized in accordance with U.K. or U.S. laws. Experts warn that if they want to return to the domestic stock market， companies must reorganize according to Chinese laws.

Open Door

Another important factor driving the return of overseas listed Chinese firms is Chinas increasingly open stock market.

The Chinese Ministry of Industry and Information Technology recently issued the Notice on Removing the Restrictions on Foreign Equity Ratios in Online Data Processing and Transaction Processing（Operating E-commerce） Business in China， which allows fully-foreign-funded internet companies to operate in China. The notice is considered by some a response to Chinese Premier Li Keqiangs call for innovative enterprises with mixed ownership to be listed in domestic stock market.

The Shanghai Stock Exchange （SSE） is considering launching a new trading board tailored to companies in strategic emerg- ing industries. Market analysts believe that welcoming returning overseas-listed Chinese firms will be an important function of the trading board.

According to SSE vice general manager Liu Shian， the trading board will be more inclusive and cater to the financing needs of companies from emerging industries， which may feature weak profitability but innovative business modes. Moreover， the trading board will also make space for companies with special shareholding and management structures.

As the Chinese capital market opens wider， the trading board will give the green light to internet companies that arent yet profitable and pave a road for overseas listed Chinese firms to smoothly return to the domestic stock market.