Shanghai: Chinese tech firms have fallen out of love with America, and it shows - a growing number of them are looking to drop their listings in New York and head back home.
Many Chinese tech executives are betting on higher share valuations in China where stock markets have recently caught fire. They also hope to evade any legal mess when Beijing formally outlaws foreign shareholder control of firms in protected tech sectors.
An exodus of Chinese tech firms would spell the end of a profitable line of business for Wall Street underwriters. Last year, the $25 billion IPO of e-commerce giant Alibaba - the world's largest initial public offering ever - generated more than $300 million in fees.
The numbers are hard to resist. China's tech-driven ChiNext composite index has gained nearly 180 per cent this year, eclipsing the 30 per cent rise in the Nasdaq OMX China Technology Index that tracks offshore listed mainland firms.
Firms listed on the Nasdaq index get an average share price equal to 11 times their earnings. On ChiNext, they get 133 times. There's a debate over which ratio is more accurate, but Chinese executives blame US ignorance of China.
"American investors don't understand the business model of Chinese gaming companies," said a senior executive of one such firm planning to eject from New York and move back to a Chinese listing, speaking on condition of anonymity.
Earlier this year, New York-listed Chinese gaming firms Shanda and Perfect World said they would go private, while online dating service Jianyuan.com and medical R&D services provider Wuxi Pharmatech said they are thinking about it.
Analysts expect dozens of lesser-known companies to follow if they can, and they see the pipeline of Chinese companies trying to list in New York drying up.
"The possibility of stirring interest among US investors is slim," said Shu Yi, CEO of Beijing-based advertising technology company Limei Technology, which recently gave up on plans to list in New York and now is hoping to IPO in Shanghai or Shenzhen.
On Thursday, Chinese Premier Li Keqiang encouraged more of such companies to return, particularly those with "special ownership structures," referring to the contractual loopholes employed by many Chinese firms to evade restrictions on foreign ownership.
China is lining up the finances to assist the repatriation. Investment bank China Renaissance has teamed up with Citic Securities to raise funds to help delist and underwrite new listings in China, while Shengjing Management Consulting has launched a fund-of-funds that intends to repatriate about 100 Chinese firms.
Thing of the past
That Chinese Internet companies would list in the United States might seem strange, analysts say, but it once made sense.
For one thing, Chinese investors' enthusiasm for startup listings is relatively recent, whereas US investors have been rewarding Internet startups with high share prices for decades.
But more important was the fact that Chinese regulators wouldn't let such firms list in the first place. The China Securities Regulatory Commission (CSRC) has required any company to be profitable for several years before listing – a rule which ruled out most Chinese Internet companies.
But Beijing aims to make Shanghai a global financial center on par with London, Hong Kong and New York by 2020, and it can't do that without making room for its most innovative companies.
"The obstacle to coming back has been removed," said China Renaissance in an email to Reuters. "The issue is not whatever valuation you can get in China. Hot market themes are fleeting."
Profitability requirements are being eased, and there's also a shortcut: a merger with a Chinese company with a listed shell.
Chinese display advertising giant Focus Media, which bailed out of New York in 2013, said this week it will relist in China via a $7 billion reverse merger with rubber manufacturer Jiangsu Hongda in what analysts say is a model for returnees to follow.
Even if the stock market rally cools, the delisting trend is expected to continue as Beijing closes a key legal loophole.
Chinese law bans foreign investment in domestic Internet firms. Investors get around the restrictions by buying into variable interest entities (VIEs) set up by the Internet companies, including Alibaba. US courts recognise that as equivalent to ownership of the companies.
But now Chinese regulators are revising the foreign investment law. A draft version of the document published by China's cabinet explicitly forbids "effective control" by foreigners of a Chinese company in a prohibited sector.
Paul Gillis, professor of accounting at Peking University, said there will likely be an exception for VIEs such as Alibaba, which are wholly controlled by Chinese management, but that offers scant protection to foreign investors.
"Are you comfortable buying a stock where you really have no say?"