Bottom line: Chinese Internet blue chips like Baidu and Ctrip should continue to flourish on Wall Street due to their leading status, while shares of smaller names will sputter and even plunge if a recent wave of buyout offers starts to collapse.
The last 2 days have been most notable for what hasn’t happened over that time, namely the announcement of any new buyout offers for US-listed Chinese companies. Barring any new announcements on this final day of the trading week, the second quarter of 2015 is likely to end with a record 20 such privatization bids for Chinese firms looking to de-list from New York in search of better valuations back in China.
At the same time, 2 of China’s premier US-listed Internet companies are on the cusp of issuing a combined total of nearly $2.5 billion in new bonds, reflecting a new reality for Chinese companies on Wall Street. That reality is allowing China’s leading Internet names like search giant Baidu (Nasdaq: BIDU) and top online travel agent Ctrip (Nasdaq: CTRP) to still do quite well in New York, even as the far bigger number of lesser-known companies see their shares sputter.
Let’s begin with the privatization trend, which most recently saw social networking app operator Momo (Nasdaq: MOMO) announce earlier this week that it received a management-led buyout offer. That made it the 20th US-listed Chinese company to receive such an offer since April. (previous post) Since that announcement, which was officially dated on Tuesday, we haven’t seen any more similar privatization bids.
Momo’s announcement capped a frenetic 2 week period that saw at least 6 other Chinese companies receive similar buyout offers, including AirMedia (Nasdaq: AMCN), Vimicro (Nasdaq: VIMC) and China Information Technology (Nasdaq: CNIT) over the long Chinese holiday last weekend. Many market watchers are probably wondering if this sudden silence marks the end of the wave of bids, or is simply a pause.
I would guess we’re probably near the end of the wave, though perhaps we’ll see one or two more bids in the next week. Most of the euphoria fueling the wave is coming from China’s own recent stock market rallies, which have seen the nation’s markets more than double over the last year. But the rallies are showing growing signs of fizzling, which could bring an abrupt end to the privatization wave and even end up killing as many as half of the recent buy-out bids.
Baidu & Ctrip
At the same time, Baidu and Ctrip are showing why New York is still a friendly place for leading Chinese Internet companies, as each completes a massive bond issue worth more than $1 billion. Ctrip completed its issue of $1.1 billion in convertible notes earlier this week, while Baidu is likely to follow with its recent pricing of $1.25 billion in similar notes. (Ctrip announcement; Baidu announcement)
These 2 bond issues are both massive, and come after Baidu, Ctrip and many of China’s other top Internet companies have made similar sized offerings over the last 2 years. The fact that these are convertible bonds means that shareholders still have quite a lot of confidence in the stocks of these 2 companies, and are hoping to convert their bonds into company shares when they mature.
To put things in perspective, the funds raised from either of these 2 bond offerings would be enough to fund the AirMedia, Vimicro and China Information Technology privatizations combined. A few larger companies have also announced privatization bids, most notably security software specialist Qihoo 360 (NYSE: QIHU), whose market value of $8.7 billion could make it a bit tougher to buy out.
So, what’s the bottom line in all this for investors? The answer is that China Internet blue chips, such as Baidu, Ctrip and Alibaba (NYSE: BABA), should remain attractive investments for at least the next few years, and their stocks should probably grow annually by at least 10-20 percent on average over that period. But New York will be far less welcoming to smaller Chinese companies, many of which could see their shares plunge if some of the recent buyout bids start to collapse.