Wave of China re-listings coming

Many China-based businesses that have been taken private in recent years are expected to be re-listed.

Chinese companies listed overseas and taken private over the last few years are expected to begin re-listing later this year, according to panelists at PEI's Asia Forum 2014 in Hong Kong.

Because of accounting scandals at some overseas listed Chinese companies the last few years, all were painted with the same brush and quality companies trading at low valuations could be uncovered. 

“A good handful will come back this year including the larger one, Focus Media [which was acquired by a FountainVest Partners-led group],” said Scott Chen, managing director, TPG Capital, who was speaking on the panel. 

He said that although two internet gaming companies are considering take private proposals, “that’s probably the tail end of it. Everything that should be taken private has pretty much been taken private. The next wave is for them to come back.”

Peter Fuhrman, chairman & chief executive officer of China First Capital, questioned the re-listing of privatised Chinese firms. 

“The investment thesis is that something the US stock market has deemed garbage and has a transparent valuation attached to it will be able, after a small delay and cleaning up process, with the same people in charge, usually doing the same business on which the US has already rendered its judgment, will come back in Hong Kong and find investors who will pay substantially more for the same business than they could’ve bought it at two years ago on the US market.”

“Maybe it will work but it does strike me as surprising.” 

Filippo de Vecchi, managing director, Greater China at Advent International, pointed out that delisting at a low multiple and re-listing at a high multiple sometimes happens in private equity, but his firm tries to create value and improve Ebitda at the company taken private. “That’s the focus of the investment thesis. When we approve the transaction we never bank on the arbitrage.”

Paul Gillis, professor of practice, Guanghua School of Management at Peking University and former partner at PricewaterhouseCoopers, spoke about the reopening of China’s domestic IPO markets earlier this year after a 15-month freeze. 

Regulators are trying to shift from a bureaucratic approval listing process to a registration-based system similar to that of the US, focusing on disclosure and letting the market decide when companies ought to list, Gillis said. While their efforts are on the right track, so far it has been painful. 

China’s A share market remains challenging due to uncertainty in implementing the new rules. 

“They opened it with new rules then effectively closed it to readjust the rules, then opened it very slightly so only a few companies got through,” TPG’s Chen added.

“It’s very hard for private equity investors to pin hopes on the A share market. Even if it opens, that queue is so long, and you never know when the door may close again. A lot of transactions today are restructuring to go IPO in the US or to the most preferred route in Hong Kong.”

Gillis added: “By some estimates there are 7500 unexited private equity deals in China. The IPO markets are recovering but 30-50 [listings] this year doesn’t make a dent in that.”