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

over the past several weeks. The June 17, 2015 announcement that

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

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. 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.

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