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

Faced with a lengthy listing approval process, mainland companies are seeking to acquire struggling listed small-caps to raise funds

PUBLISHED : Monday, 18 August, 2014, 4:01am
UPDATED : Monday, 18 August, 2014, 9:11am

Mainland firms are increasingly turning to back-door listings as Beijing keeps a tight rein on the ranks of candidates seeking to go public - with the prospects of riches for the owners of struggling listed companies.

Just 100 initial public offerings have been allowed to hit the Shanghai and Shenzhen stock exchanges between June and the end of the year. The China Securities Regulatory Commission (CSRC) applied the clamps in the name of market stability.

Many of those companies shut out of the offerings market are unfazed by the setback, and are now hatching plans for an alternative fundraising path by targeting so-called listing shells.

"I don't bother to apply for an IPO since it will be a long and convoluted road to a final approval from the regulator," said Shao Liping, an entrepreneur involved in construction businesses. "Buying out a listing shell looks like a good idea. More importantly, it's viable."

In the mainland market, back-door listings have been used over the past two decades. A company typically buys a controlling stake in a troubled listed firm, then injects its profitable assets into the public vehicle to secure a listing status. With a listing status, the company can raise further funds through a share placement on the stock market.

With the CSRC maintaining its tight grip on floats - most evident during a bear market when it either suspends or slows down new offerings to curb fresh equity influx - the appeal of back-door listings has been rising for cash-starved companies.

The practice has often been directed by local governments or state-owned companies as they strive to bail out embattled listed companies. Loss-making firms on the verge of delisting used to be valuable assets for such local governments as they could arrange for other companies under their oversight to go public through these back-door listings.

"A listing shell is getting more and more expensive now amid the pent-up financing demand," Shao said. "I understand that there will be drawn-out negotiations before we eventually complete a deal."

Beijing suspended offerings between October 2012 and the end of last year in an effort to bolster investor confidence. The CSRC was forced to reopen the market because equity financing was viewed as the best alternative to loans while the mainland's financial industry faced increasing risks from a rise in bad loans. But the slumbering broader market stayed the regulator's hand in freely granting listing approvals.

Small-cap stocks listed on the SME board and Nasdaq-style ChiNext market in Shenzhen are emerging as good buys, given their acceptable buyout costs, say two investment bankers.

"Before it was administrative power by the local governments that counted," said Haitong Securities analyst Zhang Qi. "Nowadays, it all comes down to price, since the buyers and sellers are nearly all private entrepreneurs."

The investment bankers believe that dozens of back-door listing deals are in the pipeline.

New Century Information recently listed on the SME board. The IT company, which lost 41 million yuan (HK$51.7 million) last year, agreed with Beijing Digital Grid Technology on a back-door listing deal that valued the listing shell at 2.1 billion yuan.

"You must pay a lofty price if you want to engineer a back-door listing," Shao said.