To Join a More-Receptive Market
Staff Reporters of THE WALL STREET JOURNAL
February 2, 2006; Page C14
HONG KONG -- Call it a new form of arbitrage: If Americans love technology stocks, and investors in Hong Kong don't, list the shares in the U.S.
Some U.S. investors are looking for ways to get technology companies listed in Hong Kong moved to the Nasdaq Stock Market in the U.S., where a more receptive audience can drive shares to a higher level. Och-Ziff Capital Management, a New York-based hedge fund, already has begun the process with one company. Investment bank Goldman Sachs and Newbridge Capital, a U.S. private-equity fund with offices in Asia, are looking at it as well, according to bankers and people familiar with their activities.
Private-equity funds have pursued the strategy elsewhere. Technology companies in Singapore and Taiwan are discussing delisting and jumping to Nasdaq, according to David Liu, a banker for Jefferies & Co., who declined to identify the companies. In December, Francisco Partners, a U.S. technology-focused private-equity shop, did it in South Africa, buying all the shares outstanding of information-technology company FrontRange Solutions and delisting it from the Johannesburg Stock Exchange. Mr. Liu, whose firm worked on the deal, said the company plans to relist on a "more suitable" market.
In Hong Kong, the market is dominated by banking, real-estate and industrial shares. For years, many technology companies, even those with a China angle, have languished in trading here, plodding along without the necessary capital to grow their businesses or fund overseas listings.
Meanwhile, private-equity funds flush with cash and in search of good returns are committing bigger chunks of their capital to Asia, and need to put that money to work. The promise of reaping big gains by moving these companies to Nasdaq, where U.S. investors are bidding up China-based enterprises, is a gamble they are willing to take.
Take Superdata Software (Holdings), a Chinese company that went public in Hong Kong in 2003 at 30 Hong Kong cents (about four U.S. cents) a share. The company, which produces software for small and medium-size businesses, posted a 49% gain in revenue for 2004 from the year earlier, while profits doubled and the share price tripled. When the shares stopped trading last month, however, the company's market capitalization was around $100 million.
"We think this company was seriously undervalued," says Superdata's founder and Chairman Cen Anbin. At least one deep-pocketed investor agreed. To help the company go private, Och-Ziff put up $50 million in return for an equity stake of about 40% in a newly created, private Cayman Islands-based company that now owns Superdata, called Profit Eagle. Superdata was delisted from Hong Kong's stock exchange last month after a tender offer for its shares was completed.
According to Superdata's filing with Hong Kong regulators, it expects Profit Eagle to go public somewhere else within 18 months, where there is "an alternative, actively traded technology index," though it stops short of saying Nasdaq. Some of Superdata's shareholders, including fund managers and venture capitalists, think that on Nasdaq, Superdata could fetch a much higher share price. In a show of confidence, most minority shareholders opted to take shares in the new venture in exchange for their Superdata stock, rather than accept cash outright.
Meanwhile, Goldman Sachs is talking with two Hong Kong-listed companies about possible deals that would result in eventually relisting on Nasdaq, say people familiar with the talks. In one case, these people say, Goldman Sachs and Newbridge Capital are discussing options with a Chinese medical-devices maker called Golden Meditech. Listed in Hong Kong, Golden Meditech operates four separate health-care units and owns 20% of a fifth company -- China Medical Technologies -- that it spun off last year with an initial public offering on Nasdaq. An investment unit of General Electric infused China Medical with an undisclosed sum before the IPO.
While Golden Meditech lumbers along with a $300 million market capitalization, trading at around eight times earnings, China Medical is now a $1.16 billion company on Nasdaq, more than 50 times the previous 12 months' earnings.
"We think one of the best ways to demonstrate the intrinsic value of our subsidiaries is to have them listed separately," says Viki Li, Golden Meditech's corporate-affairs manager. Spinoffs often trade at higher valuations than their parent companies.
Goldman and Newbridge hope to carve out additional businesses from Golden Meditech, according to a person familiar with the options under discussion, and are considering putting up capital to take private a unit that makes blood-purification equipment. Goldman and Newbridge would meld that unit with a related business, acquired from a publicly traded U.S. health-care company, and list the newly created entity on Nasdaq, this person says. A Goldman spokesman and Newbridge declined to comment.
Ms. Li says she isn't aware of specific talks with investors. Kam Yuen, Golden Meditech's chairman, declined comment through Ms. Li.
Investors in these companies aren't complaining. Yang Liu, a Hong Kong-based portfolio manager for Atlantis Investment Management, has an investment mandate prohibiting her from owning private equity, so she was forced to accept the cash offer of HK$1.90 a share for her Superdata stock. Ms. Liu says she had purchased the shares shortly after the IPO and realized a gain of more than fivefold on her investment.
For others, the trend to delist is providing a sorely needed exit. Venture capitalists that provided seed money to some of these businesses also have struggled, as low-volume trading made it difficult to sell their stakes in the public market.
"I think if we could snap our fingers and turn these into U.S.-listed companies, the stocks would be much higher," says Kent McCarthy, who runs the Jayhawk China Fund, a $300 million hedge fund investing in China-related shares. Mr. McCarthy's fund owns 15.7% of Golden Meditech, and he says he would like to see the entire company move to Nasdaq.
As a Golden Meditech shareholder, Mr. McCarthy received shares of its unit, China Medical, which went public at $15 each. "Like a dummy, I sold my shares at $25. I thought it was fairly valued then," he says. China Medical shares trading at $44.20 late-morning yesterday.