Corporate China

Neglected Luye finds tonic in HK listing

New York-listed Chinese firms that privatised due to lack of investor interest are unlikely to find more success in Hong Kong unless they can show strong growth potential.

PUBLISHED : Thursday, 10 July, 2014, 6:01pm
UPDATED : Thursday, 10 July, 2014, 6:03pm

The old saying "One man's trash can be another man's treasure" certainly seems pertinent for drug firm Luye Pharma (HKEx: 2186), which has found a receptive audience in Hong Kong for its newly listed shares. The company's high valuation and strong trading debut contrast sharply with its performance during a previous life as a listed company in Singapore, where it was ignored by investors before privatising in 2012.

Some analysts are saying Luye's move could mark the start of a wave of similar re-listings for "China orphans" -- Chinese firms that listed in New York or Singapore, only to see their shares languish due to lack of investor interest. But I would caution that Hong Kong investors are quite sophisticated and will still be looking for firms with strong growth potential -- a quality that was lacking in many of the New York and Singapore-listed firms that privatised over the last 2 years.

Luye certainly seems to have a strong recipe for growth, as its profit grew 86 per cent last year to 328 million yuan (US$53 million). That story may have helped to attract Hong Kong investors, who gave the company US$760 million in new funds as part of an IPO that valued the firm at US$3 billion. That new valuation was nearly 6 times the amount that a group of private equity buyers paid when they privatised Luye and its shares de-listed from the Singapore stock exchange in 2012.

Luye's shares priced at the top of their range, and also debuted strongly in their first trading day. The stock rose as much as 18 per cent for the day before finishing up 13 per cent. One media report pointed out that another pharmaceutical firm that made a similar move from Singapore to Hong Kong, Sihuan Pharmaceutical (HKEx: 0460), has performed similar well. In that instance, private equity investors de-listed Sihuan from Singapore in 2009, and then re-listed it in Hong Kong a year later.

In that re-listing process, Sihuan saw its market value leap to US$3.7 billion, or more than 7 times the US$500 million figure it achieved in Singapore. Since that time the shares have risen another 80 per cent, giving Sihuan a current market value of US$6.7 billion.

Recent private equity buyers of undervalued US- and Singapore-listed Chinese firms must certainly be encouraged by Luye's strong reception in Hong Kong. Some 53 companies have privatised or are in the process of de-listing from New York and Singapore since 2010, including former high-flyers like Focus Media and Shanda Games (Nasdaq: GAME). About 60 per cent of those buy-outs were backed by private equity, and the list covered a wide range of industries from drugs, to hotels, to chip makers and IT consultants.

I partly believe the Hong Kong re-listing story, especially for firms that listed in Singapore and the handful that have gone to European stock exchanges. Singapore always looked interesting in theory, since it's a major financial centre and is located in Asia not too far from China. But the reality has been quite different, and very few major companies have found success with those listings. New York has been a different story, and has developed a dedicated and sophisticated group of Chinese stock followers who can understand their stories and properly value them.

Thus Singapore-listed companies that try this approach could have some success; but I don't really see too much upside for companies that de-list from New York and retry their luck in Hong Kong. Focus and Shanda were good cases in point, as both had seen their revenue and profits slow sharply due to competition and operational issues before they privatized. New York investors realised this and avoided the companies, and so will Hong Kong investors if and when these "China orphans" try to re-list in Hong Kong over the next few years.

Bottom line: New York-listed Chinese firms that privatised due to lack of investor interest are unlikely to find more success in Hong Kong unless they can show strong growth potential.

To read more commentaries from Doug Young, visit youngchinabiz.com