Late last year, Tang Yan took his Chinese dating app Momo—which he describes as a mix of Tinder and Snapchat—public on the Nasdaq. In just a few months, the stock rose 20%, and earned Tang, a former website editor, a net worth of more than $800 million. But Tang wasn’t as happy as you'd think. Despite Momo’s success on the U.S. exchange, companies trading in the red-hot Chinese stock markets were doing much better.
So on June 23, Tang and a few of Momo's other big shareholders proposed buying out the rest of the company's stakeholders with an eye on relisting the company in China. Pleased investors sent the stock upward, at least at first. Since then, Chinese stock exchanges have tanked, and like dozens of other Chinese companies attempting the same maneuver this year, Momo is now in limbo — leaving investors wondering if buying a ticket home was the right move.
It’s easy to see why Tang had originally wanted to take the company to China. The 36-year-old who lives in Beijing has watched companies trading on China’s stock markets go on a tear this year. In Shanghai, shares of traditional companies rose 60% through mid-June. A tech-heavy exchange in Shenzhen rocketed 160%. Even now, despite the tumult, Chinese stocks are up 80% for the year, and some Chinese companies boast valuations double, triple, even quadruple those of Chinese companies listed in New York
Tang isn’t alone in noticing the disparity. So far this year there have been $27 billion worth of buyout offers of Chinese companies listed in the U.S., says Dealogic, more than double the amount over the past six years combined. The largest was the $8.4 billion management bid in June for Qihoo 360, which runs China’s second largest search engine. Others included Renren, known as the Chinese Facebook, a hotel chain, a real estate firm, and the matchmaking site Jiayuan.
“The China and U.S. markets are valuing companies differently,” Paul Gillis, a professor at Peking University’s Guanghua School of Management, says. “For now, there is money to be made by relisting in China.”
But the recent crisis is casting doubt on that corporate exodus. Chinese stocks have plunged 30% in the last three weeks, leading the country to enact sweeping support measures, and put a temporary halt to IPOs altogether. Though Chinese stocks are up from where they started the year, roughly $3 trillion in market cap has been erased since mid-June.
Chinese stock markets are fundamentally different than America’s—and China's are even more of a casino. An army of 90 million small investors falsely believes the government can control the stock market and often piles into stocks when the state-run press urges them, which it’s done recently. Stocks’ rise over the past year has come as business profitability and the economy slows. “Chinese investors have repeatedly shown over the year they will happily pile into complete crap if they think they can make money,” Fraser Howie, author of Red Capitalism, says.
It’s generally a good thing that Chinese investors will have a chance to buy the tech companies relisting there. But the recent spate of buyout deals also reflect a mix of envy and myopic thinking that’s filled with pitfalls. Just days before Momo’s buyout offer, the tech-centric ChiNext board in Shenzhen started its descent, giving Tang a taste of the volatility that could be in store in China.
There are also regulatory hurdles to IPO in the country that could leave the former New York-listed companies waiting for a year or more to relist. “There are hundreds of companies queuing to list in China and many of these companies are joining the back of the queue,” Howie says.
By the time Momo and other companies can re-IPO in China, the argument for doing so might be over. “The key rationale of the whole delisting and relisting is the valuation discrepancy between the two markets,” says analyst Henry Guo of Summit Research Partners, who notes that since Chinese stocks have crashed “China investors have become more and more cautious on valuation.”
Chinese companies have their ticket home. But they may not like what they find when they get there.