BUYOUTS: China Share Slump Infects US as Panic Spreads
Bottom line: The accelerating sell-off for US-listed China shares looks overblown and stocks are likely to rebound once the panic subsidies, but many previously announced buyout bids are still likely to collapse.
The panic gripping China’s stock markets is spreading to US-listed Chinese shares, with even Internet blue chips like Baidu (Nasdaq: BIDU) and Alibaba (NYSE: BABA) getting sucked into the vortex of what looks like increasingly irrational selling. One media report is pointing out that tycoons like Tencent (HKEx: 700) and Alibaba founders Pony Ma and Jack Ma have seen their fortunes shrink by hundreds of millions or even more than a billion dollars in the latest trading day of the ongoing sell-off.
Another report cites China-based asset managers saying that a flood of privatization plans for China-listed US firms will still move forward despite the growing panic. Their optimism contrasts with growing skepticism among US investors who fear that many of the plans will collapse in tandem with China’s own crumbling stock markets. Anyone who agrees with those asset managers could make some big money right now, as the plummeting US stock prices mean many of these buyout candidates are now trading as much as 40 percent below their offer prices.
As a detached observer who doesn’t trade in these companies, I can honestly say this ongoing sell-off looks increasingly overblown, and has pushed US-listed Chinese stocks that were already undervalued to even lower valuations. If I were active in the market, I would suggest waiting until the current panic subsides and then buying some of these lesser known stocks in anticipation of a rebound.
All that said, it’s certainly not too reassuring when names like Alibaba and Baidu start to get sucked into the downdraft now hitting US-listed Chinese stocks. Alibaba’s shares slipped 0.8 percent in the latest session, even as US markets rose, pushing the stock to new lows since its record-breaking $25 billion IPO last September. (English article)
The loss reduced the fortune of Jack Ma by $647 million, according to a report calculating the latest losses from the sell-off for China’s richest men. (Chinese article) But the biggest loser on the list was Tencent’s Pony Ma, whose fortune slipped by a hefty $1.2 billion as his company’s shares slipped 1.2 percent in the latest trading session.
Smaller Companies Suffer Most
But those losses were mild compared to some of the declines for smaller Chinese companies that have announced recent privatization plans. Leading that downward charge was a nearly 12 percent tumble for China Information Technology (Nasdaq: CNIT), whose shares are now trading about 40 percent below their privatization offer price. Other privatizing firms also fell sharply, losing anywhere from 4.5 percent in the case of Mindray Medical (NYSE: MR) to as much as 16 percent in the case of Vimicro (Nasdaq: VIMC).
Those huge declines reflect increasing investor belief that many of the buyout deals will ultimately collapse, which looks like a reasonable assumption due to the rapid downturn in China’s stock markets. But at least a couple of China-based asset managers disagreed, saying the homecoming by US-listed Chinese firms was still inevitable. (Chinese article)
Their logic is relatively sound, arguing the fundamental reasons for these companies to return to China haven’t changed despite the big market sell-off. That logic says that these companies can get better valuations on domestic stock markets where investors are more familiar with their names and local market conditions.
I would agree with that logic, which is the reason that companies in general tend to list in their home markets rather than overseas. But that said, the sudden flurry of privatization bids in the second quarter looked highly opportunistic and directly tied to China’s stock market rally. That means the end of that rally is likely to kill many of the recently announced buyout deals, even though a large number of these companies could still ultimately go private and re-list at home in the next 2-5 years.
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