China Development Bank Corp., the state-owned lender charged withstrengthening the country’s competitiveness, is providing...
“CDB has an incentive to help the Chinese players, particularly the large players,to regain their foothold,” in part becau...
’High Risk’Fushi Copperweld’s shares have gained 12.3 percent to $8.95 since the companysaid on June 28 that it agreed to ...
’Smoking Guns’A person who answered the company’s main line yesterday said no one wasimmediately available to comment.Inve...
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China Go Private Capital Strategy

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Transcript of "China Go Private Capital Strategy"

  1. 1. China Development Bank Corp., the state-owned lender charged withstrengthening the country’s competitiveness, is providing more than $1 billion tohelp smaller companies leave the U.S. stock market.The nation’s biggest policy lender has offered funding so Fushi Copperweld Inc.(FSIN), a Beijing-based wire maker listed on the Nasdaq Stock Market, can buyback its shares from the public, the company said last month. China TransInfoTechnology Corp. (CTFO) said June 8 it would drop its U.S. listing with CDBfinancing. The bank has provided more funding than any other lender to help thenation’s companies exit the world’s biggest equity market, according to RothCapital Partners, which specializes in emerging markets.While more than 60 Chinese companies joined U.S. exchanges in the three yearsthrough 2011, only one listed this year after those with market capitalizations ofless than $500 million lost 53 percent of their market value. The crash began inJune 2011, when Muddy Waters LLC, a short-selling firm, raised concerns aboutaccounting and corporate-governance standards at Chinese companies byaccusing Sino-Forest Corp., a timber company that traded on the Torontoexchange, of exaggerating its assets.“There’s this sort of stigma on Chinese listed companies,” said Phil Groves,president of Hong Kong-based DAC Financial Management China Ltd., whichassists investors with due diligence of China investments. “These Chinesecompanies if they’re not really big they are essentially marooned on the U.S.listing system, where the promised land of lots of further share issuances and debtfinancings aren’t happening.”National InterestsCDB, established in 1994 and based in Beijing, is providing financing throughdollar loans as stock market losses in the U.S. prompt smaller companies toconsider moving their listings toHong Kong and other exchanges.With foreign currency loans of $187.3 billion at the end of 2011, the bank backsChinese companies by helping them obtain business across the globe.Shareholders of the lender, which isn’t listed on any stock market, include theMinistry of Finance, the National Council for Social Security Fund andstate-owned Central Huijin Investment Co.
  2. 2. “CDB has an incentive to help the Chinese players, particularly the large players,to regain their foothold,” in part because many of them are existing customers,said Peter Huang, a Beijing-based lawyer at Skadden, Arps, Slate, Meagher &Flom LLP. “The other Chinese commercial banks have not expressed a keeninterest in making available facilities in this regard.”’Red Flags’Sino-Forest, the tree grower accused of fraud by Muddy Waters, filed forbankruptcy in March after denying the allegations.Groups that bet on stock declines including Ripley Capital and JonestownResearch have questioned other Chinese businesses. Moody’s Investors Servicesaid last July that 61 Chinese companies it examined raised “red flags” due topossible accounting risks.The 53 percent plunge in the share prices of such firms since the Muddy Waters’report on Sino-Forest in June last year is more than five times the 9.5 percent fallin the same period fortop Chinese companies traded in the U.S. The biggestbusinesses include PetroChina Co., whose $254 billion market capitalizationexceeds the $206 billion of Warren Buffett’s Berkshire Hathaway Inc.After going private, the smaller companies may re-list again in Hong Kong, wherethey would aim to get higher multiples, according to Johnson Chng, head offinancial services at Bain & Co. in Shanghai.CDB Leads“The cost of compliance being listed in the U.S. isn’t low,” Chng said. “The wave todelist in one market to go to another higher-multiple market, that trend willprobably pick up.”CDB’s $1.085 billion of commitments backing delistings of Chinese companies is43 times more than China Citic Bank Corp.’s $25 million, the second-biggestamount, according to the Roth Capital data and company filings.“China Development Bank has played quite a large part in going-privatetransactions,” due to its mission to help Chinese companies, said John Shum, aHong Kong-based lawyer at White & Case LLP.Feng Qihua, a spokeswoman at China Development Bank, didn’t return ane-mailed message and phone call seeking comment on its loans to Chinesecompanies delisting in the U.S.
  3. 3. ’High Risk’Fushi Copperweld’s shares have gained 12.3 percent to $8.95 since the companysaid on June 28 that it agreed to be bought for $9.50 a share. Its stock had fallento a low in April at $5.81 as Muddy Waters accused the Beijing-basedmanufacturer of overstating production and possibly falsifying financial statementsin a narrated slide show. The manufacturer “presents a high risk of fraud,” andoverstated production at one of its factories by almost 13-fold, Muddy Waters said.The company denied all the claims, which it called “vague and non-specific,” in astatement on April 11.Hong Kong-based private-equity firm Abax Global Capital Ltd. and FushiCopperweld chairman and co-chief executive officer Li Fu will acquire thecompany with a loan provided by CDB, according to a June 28 statement. CDB isan anchor investor for Abax’s yuan-denominated private equity fund, according toits website, providing capital and “access to deal sourcing through its extensivelocal network.”“There are a few hundred Chinese companies listed in the U.S. and you’ve got tobelieve if it’s normal distribution of quality, there has got to be good ones as wellas bad ones,” Donald Yang, a managing partner at Abax in Hong Kong, said byphone.Disputed ReportsMessages left at Fushi Copperweld’s general phone line at headquarters and withThomas Horton, global marketing director, seeking comment on the financingwere not immediately returned.Harbin Electric Inc., a maker of electric motors in northeast China that was alsolisted on theNasdaq, went private in November in a buyout financed by CDB.The company’s stock slid in August after Citron Research said it “fabricatedcustomers” and overstated revenue from corporations including Guiyang PutianLogistics Technology Co. and Daqing Xinchengtai Technology Co.The Citron report was a “patchwork of fabricated evidence, falsehoods, selectiveuse of information, and clearly biased and dishonest reporting,” Harbin ElectricChief Executive Officer and Chairman Yang Tianfu said in a statement respondingto the allegations.
  4. 4. ’Smoking Guns’A person who answered the company’s main line yesterday said no one wasimmediately available to comment.Investors received 20 percent more than they would have if they had sold theirshares at the closing price on the day before the offer by company founder YangTianfu and Hong Kong- based Abax. The bid price of $24 per share was morethan 11 percent less than the stock’s peak above $27 in 2007, according to thedata.China Development Bank’s Hong Kong branch financed the privatization with a$400 million loan, at 3.5 percentage points over the London interbank offered ratefor the first 36 months, rising to 4.5 percent points thereafter.“That was one that if it had gone much further everyone was confident they weregoing to find a lot more smoking guns,” DAC’s Groves said.The deal followed the CDB-funded privatization of Shenzhen- based ChinaSecurity & Surveillance Technology Inc. in September. The offer of $6.50 a sharerepresented a gain of 58.5 percent on the previous day’s close.’Tainted Glasses’CDB doesn’t take deposits and raises money by selling bonds that have similarcredit ratings as the Chinese government. The lender is the second-biggest bondissuer after the Ministry of Finance.“People see the Chinese companies with tainted glasses, they start to wonder ifthere are any accounting scandals,” said Bain & Co.’s Chng. “It’s typical marketbehavior, you basically classify the entire sector into one.”Shareholders of China TransInfo, which provides transportation managementsystems for government agencies, were offered a price of $5.8 a share byTransCloud Co., a Cayman Islands company owned by its CEO Xia Shudong.The offer represented a 12.6 percent premium over its close on Feb. 17, the lasttrading day before it announced it had received a going-private proposal.“The debt financing is very important in closing these transactions,” Skadden’sHuang said. “Without the debt leverage the founders themselves really are notvery keen to help the private-equity firms to get the deal done.”Zhou Fan, China TransInfo’s head of investor relations, did not immediately replyto e-mailed questions concerning the financing for the delisting.“The tricky part is knowing which of these companies are really undervalued andwhich may have some level of fraud going on,” David Grimm, a partner at Paul

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