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Aberdeen warns of ‘dramatic’ under valuations in China delistings

Aberdeen has estimated that more than 200 Chinese companies with a combined market capitalisation of $1tn could be dislodged from Wall Street © Bloomberg

One of the UK's biggest asset managers has warned that investors could get a raw deal if the US goes ahead with plans to force Chinese companies off American exchanges unless they submit to audit inspections.

Aberdeen Standard Investments, the fund management arm of Standard Life Aberdeen, is lobbying the US Securities and Exchange Commission to better protect minority shareholders in New York-traded Chinese companies by preventing related parties from voting on bids to take them private.

By doing so, ASI argues, minority investors would stand a better chance of receiving a fair price for their shares, should the company decide to delist.

The call comes as Washington has increased pressure on Chinese businesses listed on its stock markets. The Trump administration has proposed forcing Chinese businesses to withdraw from US exchanges unless US regulators are able to get access to the work papers of the companies’ main auditor. The Chinese government prohibits such inspections and bans the sharing of audit documents.

ASI, which manages about £486.5bn, has estimated that more than 200 Chinese companies with a combined market capitalisation of $1tn could be dislodged from Wall Street as a result.

David Smith, Asia Pacific head of corporate governance at ASI, told the Financial Times this week that US regulations “don’t sufficiently protect minority shareholders” when Chinese groups are forced to delist.

In a letter sent to the SEC in June the fund manager said that delistings of Chinese companies would represent “a transfer of value from minority investors to [Chinese] acquirers”.

Large Chinese tech groups including Alibaba, NetEase and JD.com have in recent months carried out multibillion-dollar share offerings in Hong Kong that can serve as back-up listings if the companies are forced off US bourses.

The process of a Chinese company delisting from the US often involves merging with a related party that is allowed to vote on whether to press ahead with the deal.

“Permitting interested parties to vote effectively makes the vote in many cases a foregone conclusion,” ASI wrote in a letter dated June 10 and signed by Devan Kaloo, its global head of equities.

One Chinese company in the process of delisting is 58.com, a jobs and property-listings platform. It announced in April it was negotiating a take-private offer from a Chinese investment group that was later expanded to a consortium that included the company’s chief executive.

The offer of $55 per share for 58.com was an 18 per cent premium to the previous day’s close and valued the company at about seven times its last 12 months’ earnings. That compares to the average valuation of 29 times in the two years immediately prior to the takeover bid.

One asset manager that sold its stake in 58.com over the summer said it was “not happy” with the price but saw “little prospect of achieving a better outcome given the voting power of insiders”.

58.com did not immediately respond to a request for comment from the FT.

Historically, premiums have been “fairly low” for Chinese delistings, said Nigel Stevenson, an analyst at GMT Research, a Hong Kong-based accountancy research firm.

He noted that delisting announcements and take-private offers for Chinese companies often coincided with a depressed share price due to a period of poor business performance.

“We’ve quite often seen situations where a company [has] miraculously improved its financial performance and relisted in Hong Kong a year later,” Mr Stevenson said.

In his letter to the SEC, ASI’s Mr Kaloo asked the regulator to implement “as a matter of urgency” requirements similar to those in jurisdictions such as Hong Kong, which forbid interested parties from voting on such resolutions.

“This would give minority shareholders the opportunity . . . to reject what we believe could be valuations that dramatically undervalue these companies”, Mr Kaloo wrote.

The SEC declined to comment on the ASI letter and instead referred the FT to a statement last week that said the agency was preparing proposals in response to the recommendations of the President’s Working Group on Financial Markets, which produced its report on China risks last month.