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27 Jun, 2012

Why Are Chinese Listed Companies Withdrawing From US Market?

Source: People's Daily, Author: Yuan Quan and Xie Weiqun

Beijing, June 26, 2012, (People’s Daily Online) – Alibaba.com Limited officially delisted from the Hong Kong Exchanges and Clearing Limited on June 20, 2012. Delisting seems incredible but the Alibaba.com Limited was not the only one choosing to withdraw from the stock market.

On Nov. 2, 2011, Harbin Electric Inc. officially withdrew from the NASDAQ stock market. On the evening of Nov. 22, 2011, the Shanda Interactive Entertainment Limited also withdrew from the NASDAQ stock market.

The privatization boom began emerging among Chinese listed enterprises in the United States since 2011. Low price earnings ratio and high costs of information disclosure, and responding to query are the two main reasons.

When talking about the reasons of withdrawing from U.S. stock markets, both Shanda and Harbin Electric, Inc. mentioned the problem of high financing costs.

Yang Tianfu, CEO of the Harbin Electric, Inc., said that the price earnings ratio of the U.S. capital market is too low, leading to high financing costs. The stock price of the Harbin Electric, Inc. had reached 28 U.S. dollars per share but it dropped to 15 U.S. dollars per share after the international financial crisis.

Yang said that the Harbin Electric, Inc. is the leading enterprise in China’s electrical machinery industry and has a sustained growth in its achievements in recent years. However, its price earnings ratio is less than 10 percent in the United States, seriously underestimating its market value.

The underestimation of the market value means that a company must pay a higher cost for its refinancing, namely it needs to give out more shares to obtain the same amount of financing.

Moreover, these listed companies must pay a higher cost in the process of information disclosure. For example, it needs to pay more to engage such intermediaries as the foreign capital accounting firm. Yang Tianfu said that the high costs of financing is not conducive to the development of enterprises.

Lu Chen, chief risk officer of the Price Waterhouse Coopers, also said that the U.S. capital market not only has a high cost of information disclosure but also a high responding cost once they encounter the inquiry of the regulators and investors, which is the biggest difference between the U.S. and Chinese capital markets.

“In the United States, any investor has the right to query about the listed companies and these listed companies must give a response,” Lu said. Lu said that if Chinese listed companies are lack of preparation, they will fall into the endless responses, which not only increase the costs but also affect the image and performance of these companies.

The U.S. capital market has too strict requirement on the short-term profit of companies, which is not conducive to the implementation of long-term strategy.

The privatization can better promote the development strategy of the companies, which is also an important reason for withdrawing from the stock market. The withdrawing of Alibaba.com Limited, to a large extent, is the result of restructuring the company business and promoting the overall listing.

Gu Hong, business supervisor of the merger and acquisition in the JPMorgan Chase in the Greater China region who was in charge of delisting transaction of Shanda, said that the Shanda voluntarily withdrew from the U.S. stock market. Shanda hopes to develop into a diversified network media giant but this ambition was delayed by a series of listed plans in the United States.

Since 2009, the Shanda had taken over the Hurray Digital Media and Ku6.com, demerged the Shanda Games and tried to list Shanda on the market, hoping to build an entertainment empire. However, after the stock price of Shanda peaked at 63 U.S. dollars per share in the second quarter of 2009, it began drop all the way.

This brought decline in profitability of the Shanda. The stock price of a listed company depends on the profitability of the company. However, the newly listed companies of Shanda have a limited profitability in the business incubation period, which is bound to influence the performance of Shanda. The capital market is cruel and has special requirements to the short-term performance of listed companies. Therefore, the listed companies have to pursue the short-term performance to meet the requirements, which will impede the strategy arrangement, and affect the cultivation of new businesses.

“Judging from this perspective, in order to go further, Shanda must get rid of the short-term performance requirements and free up time and efforts to win more space for the cultivation and arrangement of new businesses,” Gu Hong said.

Read the Chinese version at: 从美国退市 企业学到了啥,