Bottom line: Focus Media could complete its backdoor listing in Shenzhen within the next month, kicking off a new wave of similar migrations by formerly US-listed Chinese firms looking for higher valuations from local investors.
Faded outdoor advertising specialist Focus Media is inching towards its goal of becoming China’s first formerly New York-traded firm to re-list in its home market, with reports that it has selected a Shenzhen-listed company to make a backdoor IPO. This particular migration has been in the works for more than a year now, and could end soon with this backdoor IPO that would see Focus take over the public listing of Hongda Building Materials (Shenzhen: 002211).
Many western investors may be scratching their heads at this somewhat strange move, since the businesses of Focus Media and Hongda are quite different. But this kind of backdoor listing is quite regular in nearby Hong Kong, where shell companies like Hongda are relatively common. Such shells were real businesses at one time, but then ultimately failed to thrive. In the US or other western markets such firms would often be forced to de-list; but stock market operators in Hong Kong and China are far less aggressive about taking such actions.
For that reason, the Chinese securities regulator might actually welcome and encourage this kind of backdoor listing, which would allow it to clean up the market of companies whose core business is essentially dead. Hongda appears to be such a company, having reported an operating loss of about $5 million on $100 million in revenue in 2014. Those figures are far smaller than those for Focus Media, which reported a $238 million profit on nearly $1 billion in revenue for 2012, its last year as a public company before it privatized and de-listed from the Nasdaq.
According to the latest reports, trading in Hongda shares has been halted for the last half year, and Focus is now preparing to submit its first regulatory documents related to the backdoor IPO. (Chinese article) Focus declined to say how much of Hongda its current stakeholders would receive following the backdoor listing. Such a listing would typically see Focus’ current stakeholders sell their entire company to Hongda, which would issue a huge amount of new shares in exchange for Focus’ asset.
Focus’ current shareholders include its founder Jason Jiang, who holds the biggest single stake of about 27 percent of the company, followed by FountainVest Partners with 20 percent, Fosun International (HKEx: 656) with 17 percent, and Citic Capital with about 10 percent. Carlyle was also a key player in helping to take the company private in early 2013, though it’s unclear if it still holds a stake in Focus.
Listing documents that Focus is preparing to submit say the company is aiming for a valuation of about 45 billion yuan ($7.3 billion), which would be nearly triple the $2.7 billion it was worth at the time of its privatization 2 years ago. While some might scoff at the huge value differential, it’s worth noting that other Chinese firms have gotten hugely inflated valuations over the last year by listing at home.
One of those, video player maker Baofeng (Shenzhen: 300431), was in the news earlier this month after its shares rose nearly 20 fold in the first month after their IPO. (previous post) Baofeng had previously tried but failed to make listings in New York. But its hugely successful Chinese IPO is capturing widespread attention, as other companies enviously eye its current market value of about 30 billion yuan and meteoric price-to-earnings ratio of about 600.
Focus has previously discussed its plan for this kind of a backdoor listing, and other recently privatized Chinese companies that were previously listed in the US will be watching closely to see how the things work out. If everything goes smoothly, Focus could easily pave the way for a rapid series of re-listings by recently privatized names like online game maker Giant Interactive and hotel chain 7 Days. All of those would almost certainly get far higher valuations from Chinese stock buyers who are more familiar with their names and far less interested in financial fundamentals than US-based investors.