Sunshine and Keyboards
Last week Ogilvy’s Justin Knapp asked me if I was aware of a list of China-based overseas-listed companies that are considering de-listing overseas. It was a good question, and I have no doubt that somewhere in the dank bowels of Goldman Sachs or Morgan Stanley are a clutch of gnomes/interns who are playing spreadsheet games and cooking up such lists.
To me lists are troublesome because they are so limited. By specifying a set of companies, the chance to miss others is too high. What is more useful is profiling, a process by which we identify what KINDS of companies are best suited to de-list.
While I expect it to evolve over time, I have started to craft such a profile. I’ll admit, it is VERY basic at the moment, but it does allow us to eliminate a fairly large number of overseas listings from consideration.
The first wave or two of offshore delistings will thus have two or more of the following characteristics:
1. Small- or mid-cap companies. Delisting offshore will be a costly process, so we can presume that companies undertaking the effort expect to be able to find a buyer or buyers for their shares in China. The capitalization of China’s formal and informal share markets is improving, but Shanghai is not New York and Shenzhen is not London. The pool of money is not large enough to sustain the wholesale repatriation of large-cap stocks. Mid-sized firms, with listed equity of up to $300-$500 million, however, should have little trouble re-listing at home, and select smaller firms will be able to tap China’s growing pool of private equity.
2. Companies who need to explain their businesses to offshore investors, but whom local investors know well. Say “Shanda” to your average U.S. investor, and he’ll look at you as if he’s waiting for the rest of the sentence. Most Chinese punters, however, know the company and won’t need it explained. As much as we might like to deny it, this “household name” recognition translates into lower investor relations costs and, in China especially, higher valuations.
3. Companies with complex ownership structures. The government is not comfortable with unorthodox shareholding arrangements that seem to skirt the law. The VIE structure I’ve discussed here several times falls into that category, as, arguably, do companies like Huawei, which has recently faced questions about its employee stock ownership program. Complex structures not only rankle government officials and foreign investors with fresh memories of Enron, they also demand a lot time and focus, and are significant time-sucks for corporate leadership. The easy answer is to dump the complex structures required to snare foreign capital and bring the equity home.
4. Companies with “State Secrets.” For all of the government’s lip service about building strong, credible Chinese companies, what is more important to the party is control over the large and high-growth enterprises of the nation. This is not some Neanderthal chest thumper: the interaction between officialdom and commerce in China is…complex. At the core of the recent dustup over global accountants auditing local firms is a fear of what such audits might reveal – not about the firms, mind you, but about opportunistic government officials. If you enjoy the sensation of your neck hairs levitating, get into a conversation with a bunch of auditors over an adult beverage. Nobody is quite sure how deep the rabbit hole goes, but any company with such accounting issues is likely to want to get clear of foreign bourses, preferably before an offshore enforcement action reveals too much of the family linen.
5. Ego listings. Over the last decade there have been a flood of listings, many by companies who don’t really need the capital and who could certainly do without the hassles, but who listed anyway in order to gain the prestige of the offshore listing. Such baubles are increasingly expensive and troublesome, and there are surely a few Chinese founder/CEOs who have watched Muddy Waters administer its transparency high-colonic to Sino-Forest with growing horror. These folks will quietly buy shares back, shut the listing or sell the pink sheet, and slink out of town.
Again, this is all a work in progress, and this list will evolve over time. However, you can see the outlines what will be left when this tide recedes, and what, if any, Chinese companies are liable to seek offshore listings in the future.
- Bringing Chinese Equity Home, Continued (siliconhutong.com)
- David Wolf on China’s Equity Markets (wolfgroupasia.com)
- Can U.S. and China Avert Accounting Armageddon? (businessinsider.com)
- WARNING: By the end of this year, there is a very real chance that U.S. securities regulators may forcibly delisting every Chinese company currently listed on a U.S. stock exchange (investmentwatchblog.com)
- REPORT: Hedge Fund Researchers Looking Into Chinese Companies Are Being Arrested By The Chinese Government (businessinsider.com)