BUYOUTS: SouFun, Baidu, Alibaba Rewarded for Staying in NY

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Bottom line: Alibaba and Baidu’s inclusion in MSCI indexes and SouFun’s new dual listing in China highlight reasons why overseas markets are still an attractive place for leading private Chinese companies to list.

SouFun eyes dual listings in China, NY

Two new developments last week highlighted why overseas listings are still beneficial and even desirable for some Chinese companies, even as a flood of New York-listed firms move ahead with plans to leave New York and re-list in China.

The first development saw MSCI, one of the world’s top index compilers, say it would include Chinese companies in its products for the first time by choosing several US-listed firms, including Internet titans Alibaba (NYSE: BABA) and Baidu (Nasdaq: BIDU). The second saw investors applaud a plan by leading online real estate services firm SouFun (NYSE: SFUN) to take control of a Shanghai-listed company, a move designed to gain access to Chinese capital markets while maintaining its New York listing.
Both of these moves underscore why top Chinese private companies should think twice before considering de-listing from overseas markets like Hong Kong and the US, even though such homeward migration may be sensible for smaller lesser-known names.

Such overseas listings subject companies to higher disclosure and accounting standards than in China, making their reports more credible in the eyes of major global investors and institutions like MSCI, a unit of investment banking giant Morgan Stanley (NYSE: MS). At the same time, SouFun’s move is showing that other options may also be available that would give companies the best of both worlds, by allowing them to maintain a primary listing overseas while using subsidiaries to tap Chinese capital markets.

Many venture-backed Chinese companies traditionally chose to list overseas until recently, since their options in China were highly limited by a system that favored big state-run firms. But many have seen their shares languish over the last few years due to lack of interest from global investors. The emergence of more new listing options in China has also encouraged many to launch privatization bids, with an eye to coming home in pursuit of higher valuations.

Most companies privatizing were smaller firms, but a few larger ones like hotel operator Homeinns (Nasdaq: HMIN) and security software specialist Qihoo (NYSE: QIHU) also launched bids. Online search giant Baidu, with a market value of nearly $70 billion, had also threatened to consider such a move after its stock lost more than a third of its value during a summer sell-off in tandem with a correction on China’s stock markets. (previous post)

Semi Annual Review

But Baidu is unlikely to re-raise that threat following its new inclusion in the MSCI’s funds. That move was part of a semi-annual review by MSCI, which decided to add stocks of 14 US-listed Chinese companies to some of its products, including its emerging markets and China indexes. (English article; Chinese article) The decision vindicated observers who argued New York was still a desirable place for Chinese firms to list, since it came just months after MSCI decided against allowing China-listed A-shares into its indexes.

The second development saw SouFun, China’s largest listed real estate firm, announce a complex plan that would see it take a controlling stake of 70 percent or more in Shanghai-listed battery maker Chongqing Wanli New Energy (Shanghai: 600847) through a private placement valued at up to 5 billion yuan ($800 million). (company announcement; Chinese article) The deal would see SouFun inject some of its non-core real estate businesses into Wanli, including its online media and Internet financial services units.

In making the announcement, SouFun said it remained committed to maintaining a listing for its core real estate services in New York, but planned to use Wanli to tap into China’s capital markets. New York investors applauded the move by bidding up SouFun’s shares by 8.5 percent.

Alibaba and Baidu shares both fell after the MSCI announcement that was somewhat expected and also came amid a broader sell-off on Wall Street. But the 2 companies’ shares are likely to get a lift from the MSCI’s announcement over the next few weeks, since they will gradually get added into the portfolios of many global fund managers who invest based on MSCI indexes.

At the end of the day, it’s important to note that Baidu, Alibaba and SouFun are all leaders in their respective fields. That was a major reason why the MSCI chose the first 2, and why SouFun’s shares rallied on announcement of its decision to stay in New York while launching a backdoor listing in Shanghai. Other companies that are among the top 3 players in their sectors should also strongly consider the benefits of offshore listings, though smaller names may admittedly be better off choosing from a growing number of boards for smaller companies being rolled out in China.

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