GEO Investing

The State of U.S. Listed China Based Companies Going Private

The pace of U.S. listed China based companies (ChinaHybrids) receiving bids to go private has accelerated over the past several weeks. The June 17, 2015 announcement that Qihoo 360 Technology Co. (NYSE:QIHU) received a going private offer of $77, a 16.7% premium over the prior day’s closing price, marks the 15th going private deal (announced or closed) in the past four months. Last week, we Tweeted accolades to Jon Carnes who, while sitting on a panel with GeoInvesting co-founder Dan David at the Marcum Microcap Conference, made the comment that he expected to see a number of U.S. listed China based companies go private.

To see what ChinaHyrbids our team owns, please see our disclosed long positions screen. Our going private screeners are based on the knowledge of, and in-house criteria developed by, our expert China researchers.

We believe part of the motivation for management teams to welcome going private deals is the belief by many investors that the China “A” share stock market may see a sharp correction within the next several months.

The Chinese “A” share stock market contains exchanges such as the Shanghai Stock Exchange and the Shenzhen Stock Exchange, where shares of China mainland-based companies are listed. “A” shares are generally only available for purchase by China mainland citizens.

Thus, ChinaHyrbid management teams and private equity firms may be scurrying to take advantage of the huge valuation gap between ChinaHyrbids and “A” share companies – before the “A” share market corrects – by going private and then eventually re-IPOing in China at much higher valuation multiples. For example, the Chinex Price Index (SHE: 399006), which is the index that includes small cap growth companies in the China A share market, has an average P/E of 115 as of June 18, 2015. However, the non-binding go private price of QIHU of $77.00 is only 22 times of the analyst estimated EPS in 2015.

Fosun has a History of Investing in US Listed Chinese Companies that Have Gone Private

While we just introduced a comprehensive list of over 40 ChinaHybrid candidates that we think could go private to our premium members, we are particularly interested in investing in names that China-based Fosun International (0656.HK)  has ownership interests in. Fosun has a history of, and reputation for, investing in US Listed Chinese companies that have gone private or have pending deals to go private – including QIHU. In total, Our Fosun International going private screen highlights nearly 20 ChinaHybrids. We first introduced Fosun to our members when we wrote a bullish article on Perfect World Co. Ltd. (NASDAQ:PWRD) in April of 2013, where we stated that the company could be a candidate to be taken private due to Fosun’s ownership of it. The stock was trading at $9.33 at the time of the article and is now sitting on a pending $20.20 going private proposal. Thus far, at least 3 stocks that Fosun has invested in have gone private and 5 are pending consummation.

Outside of the on-the-ground due diligence that our seasoned team performs in China, there is no better way to identify which ChinaHybrids to invest in where fraud risk is minimized than by following the footsteps of proven institutional investors. When dealing with risk, we say “minimized” instead of “eliminated,” because risk is never 100% out of the picture. Many degrees of fraud exist with ChinaHybrids and endorsements from institutions don’t always vett a company as an investment. Even if a ChinaHybrid is fraudulent to some degree, it still may be a candidate to go private at the right price. Over the years, we have witnessed a few names that we believed were clearly fraudulent that still ended up being taken private.

GeoInvesting has been providing specialized research in U.S. listed China based companies for over seven years. Join our Premium members who can view our two new specialty going private screens here (for Fosun companies) and here (for non-Fosun companies).

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