Why do China’s biggest internet firms go public in the US? In the VIE structure, if the company goes bankrupt foreign investors can’t access the company’s assets in China

June 9, 2014 Leave a comment

Why do China’s biggest internet firms go public in the US?

Staff Reporter

2014-06-03

Shopping website Jingdong Mall (JD.com) has become China’s third-largest internet firm to do go public on the Nasdaq in the United States after Tencent Holdings and Baidu amid a wave of listings by Chinese internet companies in the US, the People’s Daily Overseas Edition reports.

Why is it that internet firms with the most growth potential, the most innovative technology and profitable prospects, prefer to go public in the US or Hong Kong rather than in mainland China, the newspaper asked, answering its question by saying that it was because the comparatively strict listing thresholds for A-shares rejected these internet powerhouses.

After keeping their heads down for the past two years after a number of Chinese firms were booted from US bourses for unorthodox accounting, Chinese internet firms began a new wave of US listings late last year that has peaked over the past two months. These include Weibo on April 17, Cheetah Mobile on May 8, Tuniu Corp on May 9, and finally Jingdong Mall.

Jingdong’s listing has created a market value of US$27.2 billion, making it the largest public listing for a Chinese internet company in the US. The combined market value of Jingdong and three other Chinese listed internet firms — Baidu, Qihoo 360 Technology and Tencent — reached US$227.2 billion, exceeding CNPC’s A-share market value of 1.2 trillion yuan (US$196.8 billion) and accounting for 6% of the combined market value of the Shanghai and Shenzhen stock exchanges.

The high thresholds for A-share listings in China have made these internet firms turn to overseas stock markets. Even the easiest public listing in the Growth Enterprise Market (GEM) still requires the candidate to be profitable for two consecutive years with accumulated two-year net profit of no less than 10 million yuan (US$1.6 million), or it should be profitable over the past year with revenues no less than 50 million yuan (US$8 million). Jingdong Mall fails to reach these standards, because it had a net loss of 49 million yuan (US$7.8 million) in 2012 and 1.7 billion yuan (US$276.7 million) in 2013.

The restrictions on shareholders and employees’ holding stakes also have forced the Chinese internet firms to move offshore. Many such internet firms such as e-commerce giant Alibaba Group have chosen to use a curious regulatory loophole known as a VIE, or variable interest entity, for their overseas listing.

In the VIE structure, when foreign investors buy into a public listing in the US they are not allowed to own a single Alibaba share in China, for example, but instead their shares are registered in the Cayman Islands. In the VIE structure, if the company goes bankrupt foreign investors can’t access the company’s assets in China.

Song Liping, general manager of the Shenzhen Stock Exchange, said the current listing standard is set for traditional industries, demanding consistency and stability, however, the US listings of internet firms has triggered deep thinking and reviews by the regulators, the report said.

This year, about 30 Chinese internet companies are expected to go public in the US, with Alibaba expected to complete the process in August.

 

Filed under Macro Trends, TMT Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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