China ADRs' journey home looks complicated after equity rout
The homecoming of Chinese firms delisting in the US who are striving to list their shares on the mainland is becoming more time-consuming and complicated after the rout in equities last month.
The biggest “bull run” in the A share market, with the key Shanghai Composite index jumping as much as 150 per cent within one year between June 2014 and June 2015, has pushed up the valuation of many technology firms in Beijing.
The boom had lured as much as 25 firms listed in the US in the form of American Depositary Receipt (ADR) to go private with a total deal value exceeding USD$27 billion, and these firms are aiming to list back on the mainland for higher valuation and better liquidity, according to a note sent by HSBC to its clients.
However, this move is running into unexpected bottlenecks after the mainland equity market crashed by up to 30 per cent, prompting Beijing to suspend the approval process of initial public offerings to avoid additional pressure on the market.
“We expect the trend for Chinese ADRs homecoming will continue, but the recapitalization process will be complicated and time-consuming,” said HSBC analysts led by Roger Xie.
“There have been 25 Chinese ADRs going private so far, but the A-share sell-off and temporary freeze on IPOs cause uncertainty and the privatization process can take time.”
Chinese ADRs need to go through a lengthy privatization process usually lasting from six months to two years, HSBC said.
The equity rout has made some offer prices by Chinese ADRs look pricey. In the past two months, Chinese ADR share prices have declined during A-share sell-off. The average potential return of risk arbitrage, the go-private offer price over the current share price, is rising.
According to the HSBC, 18 recent deals’ average return has risen to 22 per cent from 11 per cent when deals were announced – meaning that US-listed Chinese firms would have to pay a bigger premium to share price if they want to go back home.
Year-to-date, ChiNext, a NASDAQ-style board of the Shenzhen Stock Exchange, is up 75 per cent. By comparison, NASDAQ’s Dragon Index, the gauge for Chinese ADRs, is only up 12 per cent during the same period.
Moreover, Chinese companies have been using VIE (Variable-Interest-Entity) to list overseas, but such a corporate structure is barred from listing on the mainland, although Shenzhen Stock Exchange said it is studying the possibility to allow VIE-structured firms to list there.
China’s government is also calling to establish a separate board at Shanghai to help high-growth start-ups. Most of these take-private companies are in the internet, media, telecom and healthcare sectors.
“There is a possibility in our view that during the A-share IPO freeze, China’s over-the-counter board, the National Equity Exchange and Quotation (NEEQ), could become one of the alternative listing bourses. Listing requirements on NEEQ are less strict for start-ups. But NEEQ corresponding index and turnover have also dropped 40 per cent and 65 per cent from the peak respectively in past few months,” HSBC noted.