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CSRC sidesteps question about rumoured ban on reverse takeovers

US-listed Chinese companies have been flocking to relist on the A-share market

PUBLISHED : Friday, 06 May, 2016, 8:23pm
UPDATED : Friday, 06 May, 2016, 9:09pm

China’s securities market regulator sidestepped a question about a rumoured ban on reverse takeover deals by US-listed Chinese companies in the A-share market after Chinese American depositary receipts and shell companies’ prices plunged in the past two days.

“We have noticed the great price difference in the domestic and the US market, and the speculation on shell companies, and are studying in-depth about the influences,” China Securities Regulatory Commission (CSRC) spokesman Zhang Xiaojun said on Friday.

US-listed Chinese companies have been flocking to relist on the A-share market since early last year, when the domestic market started a bull run, in order to shed depressed valuations in US markets.

The most popular way to get relisted on the A-share market is through a reverse takeover deal with a shell company.

We have noticed the great price difference in the domestic and the US market, and the speculation on shell companies, and are studying in-depth about the influences
Zhang Xiaojun, CSRC

The shells they seek are Shanghai- or Shenzhen-listed firms with lacklustre earnings or even loss-makers, whose major shareholders are willing to transfer control to other investors and cash out from the business.

The shell company could buy a bigger privately held company through a share exchange that gives the private company’s shareholders control of the merged entity. The process is called reverse takeover, or back-door listing.

Meanwhile, around 800 initial public offering (IPO) candidates on the mainland are competing for the tightly controlled IPO quota, after the new CSRC chairman, Liu Shiyu, delayed a reform aimed at introducing a registration-based IPO approval mechanism.

“The two kinds of demand have been pushing shell companies’ share prices sky high, as punters are betting on great .. jumps of the shell companies’ market value,” a director of an A-share-listed company said.

Hong Kong regulator cracks down on back-door listing

After Qihoo 360 Technology, a Chinese internet security firm listed on the New York Stock Exchange, announced its privatisation and delisting, indicating it planned to relist on the A-share market, the share prices of a number of potential shell companies in China surged, including those with the number 360 in their stock codes.

However, the share prices of the shell companies fluctuated wildly in the past two days after rumours spread that the CSRC planned to ban or restrict reverse takeover deals and related financing programmes as part of its campaign against speculative activity.

Mainland Chinese firms increasingly turn to back-door listings to raise funds

Shenzhen HiFuture Electric, a potential shell company involved in the 360 case, dropped by 10.01 per cent, the daily downward limit, to 13.84 yuan.

Momo, a Nasdaq-traded Chinese dating app company that is being privatised, plunged by 5.41 per cent to US$15.57 during on Thursday.

Brett McGonegal, chairman of Capital Link International, said the major driving force behind the privatisation and relisting of US-listed Chinese companies was “valuation and shareholder knowledge.”

Companies listed on Shenzhen’s ChiNext board for hi-tech and fast-growing companies are trading at an average price-to-earnings ratio of 70 times, compared with 13.4 times in the blue-chip camp Shanghai, 9.3 times in Hong Kong and 20.3 on the Nasdaq.

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