US-listed China stocks are unloved by investors. Short-seller Muddy Waters and other entities have raged in the China space, leaving China stocks at historically low levels.
According to Jason Jiang, Chairman and CEO of Focus Media "The US market is so difficult to comprehend- the better a company is, the more it drops," he complains. "Is it because our results are so good that the short-sellers are embarrassed and feel the need to spread all manner of gossip?"
On August 14 an investment consortium made an offer of $27 for each ADR of Focus Media (FMCN). A total of 19 Chinese companies delisted from American exchanges during the first half of this year. At least 16 more companies are in the process of attempting to delist.
Many US-listed Chinese companies have their eye on going private. This is the combined result of the current weakness of the U.S. capital markets, significant losses in the value of many US-listed Chinese companies, and pessimistic market forecasts that have resulted in trading at values below what controlling shareholders, management or private equity firms may think certain companies are worth.
The United States is no longer the perfect honeymoon for Chinese companies that want to connect with Westerners. Going private seems to be the only solution for many US-listed China companies. The enormous compliance costs associated with being listed in America are a heavy burden for these companies, especially if a listing doesn't give anything back. Trading and liquidity for many smaller companies is low, and the legal environment is quite different than in mainland China.
Low trading can be explained partly by the lack of attention Western analysts pay to Chinese businesses, particularly smaller ones from lesser-known sectors. When liquidity isn't good, it's difficult for Chinese companies to obtain further funding from the stock market.
So I really think China's leveraged buyout spree is not ending soon.
Mitt Romney made a lot of money arranging LBOs and private deals at Bain Capital. But we as private investors could also profit from potential deals.
Below are some companies that could be the next target.
Guanwei Recycling (GPRC)
Guanwei Recycling Corp. is China's largest manufacturer of recycled low density polyethylene (LDPE). Adhering to the highest "green" standards, it has generated rapid growth producing LDPE from plastic waste procured mostly in Europe for sales to more than 300 customers in more than ten different industries in China.
The company came with better than expected second quarter results. My revenues and EPS projection were too conservative. Revenues came in at $18.6 million and EPS was $0.15.
Mr. Min Chen, Chairman and CEO of Guanwei commented, "There has been a significant negative overreaction in the U.S. stock market to China-based companies, even to strong, well managed companies such as ours. However, we will keep working hard to grow our Company and rebuild investor confidence in our successes."
The current depressed price of $0.80 would be a great reason for management to take the company private. Their biggest institutional shareholder FCG Advisors sold more than 600.000 shares recently.
American Lorain (ALN)
American Lorain is the largest manufacturer of processed chestnut products in China. The company launched its chestnut business in 1995 and currently American Lorain's products include chestnut products, convenience food products and frozen food products. The company currently sells over 240 products to 26 provinces and administrative regions in China as well as to 42 foreign countries.
My first article published in February 2011 about American Lorain shows more insights about the company.
This year American Lorain had some disclosure problems with the SEC regarding professional backgrounds, training and education of their accounting and finance personnel. As mentioned in their 10-Q American Lorain's internal controls over financial reporting are not effective. Of course you could blame the company because it doesn't meet the standards expected by US investors.
Despite that I think this company has shown that it can survive the uncertainties facing the Chinese economy. With a P/E below 4 management could take action, especially because corporate governance seems weak. They hold 46.6% of the shares.
Longwei Petroleum Investment Holding (LPH)
Longwei Petroleum Investment Holding Limited, incorporated on March 17, 2000, is an energy company engaged in the wholesale distribution of finished petroleum products in China. The company's oil and gas operations consist of transporting, storage and selling finished petroleum products.
A lot has been written lately, and it seems that I am not the only one that thinks Longwei is a takeover candidate. SA contributor Mr. Chen wrote already an article about privatization of US-listed China companies and mentioned Longwei also in his article. One of the best free research reports about Longwei comes from MaxSoar which values the company between $5.00 to $5.42 per share.
Yongye International (YONG)
Yongye International is a Chinese agricultural nutrient company. The company markets two lines of nutrient products based on fulvic acid: a liquid nutrient product which is sprayed on plants, and a powder nutrient product which is added to animal feed. The company sells its products through a selected network of over 810 county-level distributors and 32,015 independently owned Yongye-branded retailers spanning over 30 provinces in China.
Second quarter results were good, EPS of $0.74, great account receivable collection, nice profit margin. The long-term market growth of crop nutrient products in China is the key driver for this company.
A fertilizer company that is trading with a P/E below 3 is a steal.
Of course there are many more companies that could look for opportunities to go private. Private equity is looking for China deals, because they see potential for listing US-listed China companies again in Shanghai, Shenzhen or Hong Kong, where higher valuation multiples beckon.