The explosive share price performance 360 Technology’s (Qihoo 360) backdoor relisting vehicle SJEC [SHA:601313] over the past three weeks and the deal’s swift – to date – regulatory approval progress has caught the market’s attention. But it does not necessarily herald the re-ignition of the Chinese ADR exchange arbitrage trend as it may be a special case, said mainland deal advisors.
SJEC’s market value touched CNY 370.6bn (USD 56bn) on 1 December after its shares had traded 10% limit up for 18 days in a row on the Shanghai stock exchange. SJEC’s market value is around 5.3x the value of Qihoo’s equity when delisted from NYSE for USD 9.2bn in July 2016.
The market valuation provides a 2017 P/E multiple of 146.56x and a forward P/E multiple of 111.19x based on company estimated net profits of CNY 2.2bn (USD 332.2m) in 2017 and CNY 2.9bn in 2018. These multiples are higher than the weighted average of 52.64x and 42.44x in A-share market’s internet and related service sector.
The 5.3x equity multiple is directly in line with the corresponding multiple for the combined value of the three former Chinese ADRs – Giant Interactive, Focus Media, and Perfect World – that managed to relist in China before a backdoor listing crackdown. These companies were taken private for a combined USD 8bnand today have a market value of USD 41.9bn in the A-share market
Despite Qihoo’s apparent successful listing, there is still a lack of clarity around China Securities Regulatory Commission’s (CSRC) policy change towards Chinese ADR relistings, said an advisor at a China-based investment bank. It’s unclear whether the SJEC/Qihoo deal is a one-off or a precursor of more similar delist/relist transactions, the source added.
Back in May 2016, the CSRC expressed deep concern about backdoor listings of former Chinese ADRs and the associated “irrational” speculation in shell companies.
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