***Update: for investors interested in this topic, please see the academic paper "Why Do U.S.-Listed Chinese Firms Go Private" by Jens Ording Hansen and Fredrik Oqvist.
There has recently been a number of US-listed firms that have announced "going private" proposals, ostensibly part of a grander scheme to de-list in the US and relist in China. Focus Media recently accomplished this round trip with a backdoor listing in Shenzhen.
Some companies which have recently announced deals include Mindray Medical (MR), JA Solar (JASO), Taomee Holdings (TAOM), Jiayuan.com (DATE), China Cord Blood (CO), Wuxi PharmaTech (WX), China Mobile Games and Entertainment (CMGE), Xueda Education (XUE), and Sungy Mobile (GOMO).
Clearly this trend is growing, in part due to lowering restrictions to IPO in China, and what appear to be a dismantling of the infamous VIE structure, and a valuation gap between mainland and offshore shares that is wide enough to drive a truck through. The last point, the valuation differential, is most likely the lynchpin in the argument, carrying the most weight in decision makers' minds.
Indeed, the Shanghai Composite is trading on a P/E ratio around 35x, dwarfing the S&P 500 trading range of about 20x, and about 23x for the Nasdaq (the "riskier" tech stocks).
When looking at the comparison, why wouldn't one choose to list at home, to raise as much money as humanly possible? After all, with the government-backed bull run in A-shares, the champagne (or baijiu?) will keep flowing for years to come, right? Looking at the economic data, that scenario seems tough to believe, but the pending inclusion of A-shares into major indexes (MSCI has been mulling the idea) could bring more liquidity.
By making the decision to chase the hot markets, CEOs and CFOs are making an incredibly short-sighted mistake, one not terribly unlike Chinese punters who are currently investing in numbers, not businesses (the "give me a stock code, not a stock story" investment technique).
For investors in Chinese companies listed in the US, these defections back to China may serve as a helpful barometer to measure management. Some of the stocks have been trading relatively lower valuations, however that can be overcome by an effective investor relations program and improved corporate governance. US investors are willing to pay up for companies, however management teams that are (deliberately?) parsimonious with information and have poor corporate governance are shooting themselves in the foot. Cynics may argue the current strategy is a way to get a cheaper price for an eventual buyout, something that shouldn't be immediately dismissed. There are myriad ways to improve engagement with the market, however that would require shifting the burden to the company, with an upfront financial burden.
But that approach seems less attractive for insiders than the slow arbitrage between buying US-listed stock for $5 and selling them in China for $10. One small wrinkle in that plan, however, is assuming that in a few years, there are buyers at $10, i.e. the domestic stock rally will hold up.
To speculate that the rally in mainland shares will persist for a few years, continuing to defy a slowing economy, seems overly optimistic at best and naïve at worst. So for those companies chasing the "going private" agenda with hopes of a Scrooge McDuck-style swimming pool of money on the other side, good luck.
