New | Reality bites as slump in Chinese markets hits listing hopes of New York-traded tech firms
Beijing suspended initial public offerings in an apparent attempt to halt the influx of new equity and underpin stocks
So much for the planned return of New York-listed Chinese technology companies to the A-share market, which was expected to ensure a huge surge in their capital levels. Reality bites.
Beijing suspended initial public offerings (IPOs) over the weekend in an apparent attempt to halt the influx of new equity and underpin stocks, which have endured a brutal recent sell-off.
Founders and senior executives of China’s technology stars have learned a painful lesson: the present volatile mainland market is far from what they expected.
Since March, the growing influence of mainland equity investors has had a strong impact on the US stock market.
The founders and major shareholders of Chinese companies trading in New York were keen to list back on the mainland exchanges. They expected the lofty valuations of tech firms on the A-share market would help to drive up their net worth several times higher than present levels.
However, such hopes have been dashed after sharp falls have wiped out nearly US$3 trillion from mainland stocks exchanges in only three weeks.
The China Securities Regulatory Commission imposed the temporary IPO ban for the eighth time in history, without elaborating on how long the suspension on new share sales would last.
“It’s too early to predict that a flood of US-listed Chinese firms will return to the A-share market,” said Clark Lee, a principal at the auditing firm EY. “There are still a lot of uncertainties and risks in the process.”
About 20 companies, including Qihoo 360 Technology have kicked off their campaign for relisting on the mainland market, following the dazzling performance of Baofeng Technology, which focuses on digital products including portable DVD players and tablet-sized personal computers.
Baofeng, after failing to launch an IPO in the US, carried out structural changes and listed its shares on the Nasdaq-style ChiNext market on the Shenzhen Stock Exchange in March.
As of June 10, shares in Baofeng had jumped 42-fold from the offering price of 7.14 yuan – closing at 307.56 yuan.
Since then trading of Baofeng’s shares have been suspended because it was working on a major deal.
Last Thursday, Baofeng announced it would be teaming up with China’s electrical appliance giant, Haier, to tap into the internet TV market.
About 100 Chinese businesses, most of which are tech companies, use the so-called variable interest entity, or VIE, structure which is designed to let companies bypass Chinese government bans on foreign ownership in some business sectors.
Another 1,000 tech companies aiming for an overseas listing embarked on the VIE model as they raised funds from venture capital and private equity investors.
To return to the mainland market, the overseas-listed firms need to go private and conduct ownership restructuring to comply with Chinese laws and regulations.
From October last year until the middle of June, the A-share market – buoyed by leverage buying – surged about 120 per cent before it slumped amid panic selling.
The market rally generated dozens of new dollar billionaires in China as frothy stock prices inflated their personal net worth.
Qihoo’s market value could surge more than five-fold to over 300 billion yuan if it were to relist on the A-share market, the 21st Century Business Herald reported
Analysts said the road to an A-share market return would turn out to be convoluted because the restructuring carried risks.
Beijing has yet to formally accept the relisting of the VIE companies, but – more importantly – the roller-coaster ride on the A-share market would probably foil the founders’ hopes of huge overnight profits.
“The A-share market has yet to prove that the high valuations will be sustainable,” said Amanda Zhang, a partner at PwC. “The senior management of the US-listed firms will still take a long view before making any decision about whether they should return.”
