Barron`s, Business, China - Sat March 17, 2012

Some Chinese Surrender U.S. Listings

Skepticism about accounting, lower valuations and the lure of the homeland contribute to the nascent trend.

Smart young Chinese executives once flocked to the U.S. in search of capital, credibility and, through listings on the Nasdaq and the New York Stock Exchange, a critical mass of knowledgeable investors.

That’s no longer necessarily true, at least when it comes to listings. Spooked by stricter regulations, swooning valuations and probing analysts, some Chinese companies are delisting their stocks in the U.S. and making the long trek home. Some are even considering relisting in the People’s Republic or Hong Kong, lured by looser regulation and a flood of liquidity.

Last year, roughly 30 Chinese companies with combined stock-market values of $3.5 billion left the NYSE and Nasdaq, versus none in 2010. Some were taken private through management buyouts. Some retreated to the obscurity of the over-the-counter Pink Sheets. Others left under fire from critics or regulators. Meanwhile, Chinese corporations raised just $2.2 billion last year through New York IPOs.

THE MOST NOTABLE DEFECTION of 2011 might have been that of Harbin Electric (ticker: 1133.Hong Kong) which went private in a $754 million deal in October 2011. A similar-size transaction was approved in February, when Shanda Interactive’s shareholders voted overwhelmingly to take the Shanghai media firm private in a $750 million transaction.

That some Chinese are forsaking the U.S. should worry Nasdaq and the Big Board. For years, Chinese Internet outfits, including search giant Baidu (BIDU), considered New York their second home. By the end of 2011, 174 Chinese stocks (companies based in mainland China, not Hong Kong) were listed on the two big American exchanges. But getting more to do so might prove difficult.

Take valuations. China’s fourth-largest online gaming firm, Perfect World (PWRD), trades at just 4.6 times estimated 2012 earnings on the Nasdaq, while a smaller rival, NetDragon Websoft (777.Hong Kong), trades at a shade over 13 times. Jialong Shi, a technology analyst at CLSA in Hong Kong, tells Barron’s: “Investors in China and Hong Kong are willing to pay more for Chinese stocks than U.S. investors.” These higher valuations in turn compel mainland executives to delist their shares in New York. No Chinese stock has yet delisted in the U.S. and relisted in the People’s Republic but, Shi believes, “it’s only a matter of time.”

Analysts and bankers close to Shanda co-founder Chen Tianqiao believe that he won’t relist Shanda Interactive in Shanghai, but may seek to float one of its smaller subsidiaries there, probably Web-based gaming firm Aurora or online literary platform Cloudary. (Beijing bars mainland firms from listing both a group and a subsidiary on the same local bourse.)

Then there is the distinctly dodgy reputation earned by all-too-many U.S.-listed Chinese corporations; Barron’s has been writing about the accounting problems at these firms for years. The reputation, Shi believes, leads American investors to “factor in a discount on Chinese companies.”

Take Longtop Financial Technologies, whose failings were exposed by Citron Research analyst Andrew Left. Longtop was trading north of $40 in early 2010. But it was delisted last August by the NYSE after, among other things, its audit committee’s members quit. The SEC is investigating the company, which failed to file an annual report for its fiscal year ended last March.

Harbin Electric, a motor maker, left the Nasdaq last November, after Chairman Yang Tianfu took the firm private. Yang said he was “tired of the U.S.” But his ire was mainly directed at short-sellers like Left, who had accused Yang of “failing to be honest” in his SEC filings, and at independent journalist Roddy Boyd, founder of thefinancialinvestigator.com, who also wrote unflatteringly about Harbin.

LEFT CAUTIONS INVESTORS TO BE careful when buying Chinese stocks. “I don’t want people to think I’m Sinophobic,” he says, “but this is a country going through growing pains, and one of those pains will be companies fiddling their books.” Says Boyd: “Chinese companies listed in the U.S. are more likely to be fraudulent, and liable to resort to accounting chicanery, than corporates from any other country.”

Also tugging some Chinese companies home is the not-inconsiderable pull of the motherland. Beijing, notes Dick Wei, a JPMorgan Chase analyst in Hong Kong, has long been desperate to lure back the Chinese tech titans listed in New York. And most mainland entrepreneurs do most of their sourcing and selling in China, which offers a red-hot economy, looser regulation and less skeptical analysts and investors. In addition, China increasingly offers capital and willing investors.

Add it all together, and it’s clear why the long march home has begun for some in China’s army of entrepreneurs.

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