Evaluate Chinese ADR Going Private Offer

On July 6th, we have witnessed another volatile trading session, most Chinese ADRs tumbled amid concerns over Chinese equity market.

The question is shall we hold on to the announced deals?

My answer: Yes.

Chinese ADRs are highly correlated with the Chinese stock market. My view on the drop of Chinese equity market is that the it mainly comes from lack of liquidity and the crazy valuation in the last few months. We should see support for the large blue chips and they are not overvalued. But small cap index should still fall further. The volatility caused panic selling of ADRs and what’s worse is a temporary halt of IPOs further makes market re-evaluate the risk inherent.

First, conclusion is that deals will not be withdrawn.

Reasons:

a. The investor and insiders know the privatization takes more than six months to two years. And they are definitely aware of the nature of Chinese equity market. Time is on their side. The IPO will open once the equity market stabilizes.

b. The reason they want to take the companies to Chinese market is for a better valuation. They are aiming for PE 40 instead of PE 15. Most ADRs are market leaders, and misunderstood by US investors. They are much better companies than the ones currently on the A shares market and will definitely command a better valuation.

c. Even with all the turmoil, I see steady progress:

E-House (China) Holdings Limited (ADR)(NYSE:EJ), offer $7.38, trade at $5.9

July 3, 2015 EJ… today announced that the Independent Committee has retained Duff & Phelps, LLC as its financial advisor … connection with its review and evaluation of the non-binding proposal letter, dated June 9, 2015, from a buyer group proposing a going-private transaction to acquire all of the outstanding ordinary shares of the Company not already owned by them.

AirMedia Group Inc (ADR) (NASDAQ:AMCN), offer $6, trade at $4.5

Airmedia’s Special Committee retains Duff & Phelps to evaluate previously announced going private offer and any potential alternatives (AMCN). (Be careful of this one…the first offer may be too good).

Momo Inc (ADR)(NASDAQ:MOMO), offer $18.9, trade at $14.75

On July 6, 2015, the Buyer Group entered into a consortium agreement (the “Consortium Agreement”), pursuant to which the Buyer Group will cooperate in connection with a possible acquisition transaction (the “Transaction”) with respect to the Company as contemplated by the Proposal.

On July 7, 2015, Sequoia Capital China Growth Fund I Lp has filled a SC 13D form regarding Momo Inc . Filing Link: 000119312515245689. Per Sequoia Capital China Growth Fund I Lp’s filing, the filer now owns 6.6% of the company, holding 18,570,966 shares. (The filing is due to transaction prior to the “Going Private” announcement).

Duff & Phelps advised CMGE and PWRD evaluate and enter the Definitive Merger Agreement.

d. Regardless, there are new deals announced after the large drop.

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One thought on “Evaluate Chinese ADR Going Private Offer

  1. […] 7/4/2015: as we observed the dramatic collapse of Chinese A share market and an indefinite delay of IPO from authority, we may not be able to see more Going Private deals, and for the ones announced, even though the author thinks most deals will still go through, but readers should be cautious of the risks and concerns over deals withdrawal. Thoughts on recent tumble.  […]

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