Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
It is amazing how some things can change course. Back in 2006-2007 (and even in pockets of late 2009 through 2010) the market was grasping at anything Chinese. We had the Chinese Facebook, the Chinese Youtube, the Chinese this, the Chinese that. Many of these names in the past few years have been on far weaker quality than the initial group back in the middle of the last decade (some state owned). And some of the smaller ones have come in through the back door i.e. reverse mergers. [Apr 12, 2011: (Video) CNBC – Muddy Waters – Beware the Chinese Reverse Merger] [Aug 3, 2011: China’s Shortcut to America via Reverse Merger] I was always astonished at how many Chinese companies were listed in the U.S. relative to other BRIC countries. Russia has about a handful, India ~15, and Brazil ~30. China was somewhere around 200.
For those who have been following the markets the past year or two, you have surely heard about the high profile “scams” and a bevy of these names being targeted by 3rd party blogs who specialize in shorting. We had one just this week with New Oriental Education (EDU). Even hedge fund maven John Paulson was marred by his investment in Sino-Forest. It is difficult enough to come back from such accusations if it is an American company but once the smoke signal comes out for a Chinese firm, everyone assumes fire. In fact it has led to a serious discount in almost all companies of a Chinese nature.
It appears it has reached the point many of these companies are simply leaving or in the process of leaving U.S. exchanges altogether. Obviously some positives and negatives to that – hopefully for those which do come to U.S. exchanges, the quality shoots up to a far better level than what has been sent out the past few years.
Via BW:
- More than 60 Chinese companies joined U.S. exchanges from 2008 through 2011, hoping to cash in on the Western appetite for Asian growth stocks. Now some of those companies are pulling up stakes. China Development Bank, the state-owned lender charged with strengthening the country’s competitiveness, is providing more than $1 billion in financing to help companies leave the U.S. stock market.
- Many smaller Chinese companies gained listings via so-called reverse mergers—buying a company that was already traded on a U.S. exchange. Investor enthusiasm collapsed after Hong Kong-based short-selling firm Muddy Waters in June 2011 accused Sino-Forest, a timber company that traded on the Toronto exchange, of exaggerating its assets. Sino-Forest filed for bankruptcy in March after denying the allegations. Those allegations raised concerns about accounting and corporate-governance standards at Chinese companies. The 82 companies in the Bloomberg Chinese Reverse mergers index lost 52 percent of their market value from June 2011 through July 16.
- Partly as a result, only one Chinese company has listed in the U.S. this year, and several have left. “There’s this sort of stigma on Chinese-listed companies,” said Phil Groves, president of Hong Kong-based DAC Financial Management China. “If they’re not really big, they are essentially marooned on the U.S. listing system, where the promised land of lots of further share issuances and debt financings aren’t happening.”
- China Development Bank has offered funding so Fushi Copperweld (FSIN), a Beijing-based wire maker listed on the Nasdaq Stock Market (NDAQ), can buy back its shares from the public, the company said last month.China TransInfo Technology (CTFO) said on June 8 it would drop its U.S. listing using CDB financing. Harbin Electric, a maker of electric motors in northeast China that also was listed on the Nasdaq, went private in November in a buyout financed by CDB. The deal followed the CDB-funded privatization of China Security & Surveillance Technology in September. Some of the companies are delisting after being attacked by analysts. F
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Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
