With Higher Valuations in Mainland, Companies Consider Issuing A Shares

Chinese companies are thinking about dumping their VIE structure in order to list on the A-share market. Ran Wang of China eCapital discusses some situations where it makes sense and where it doesn't. The best reason to invest in Chinese technology shares is not due to valuations or government support, but because:
the Internet (especially mobile Internet) reconstruction of traditional industries in China is happening at a much more frenetic pace than in Europe and America.

Scott Sumner touched on this in his recent report from his wife's trip to China:
1. Young people in Beijing now carry little cash, and use their cell phone to buy things.

2. They like to order take out. It’s often cheaper to use your cell phone to order delivery of a cup of coffee, than to buy one at Starbucks. Must be nice.

3. The apartment buildings have individual storage boxes for delivery packages. The delivery person has the code to open it and leave a package; you use your cell phone to open it and pick up your package. Maybe this high tech stuff is also common here, I’m totally out of touch. But China wasn’t like this back in 2012, our previous trip.

4. A Uber-type taxi company is very popular, quick to arrive, and extremely cheap. It’s first come first serve. (Last time I was there regular taxis were also cheap, but hard to get.)
I can't compare apples to apples because I don't spend a lot of time in major U.S. cities, but I would guess the the average person under 40 in a major Chinese city is using as much or more technology than the average person in America's most wired city. Working in China's favor are a few things. There's a lack of infrastructure and cultural inertia, such that credit cards only became popular a few years before it was possible to pay with your phone. Going from credit cards to paying with a mobile phone is like going from CDs to MP3s in music for them. Whereas in the U.S., credit cards are very easy to use and widely accepted. This could also be dubbed a lack of cultural inertia. Population density helps a lot. Perhaps most importantly, whereas China may get old before it gets rich, Chinese youths are the ones getting rich. In the West, societies have stagnated because wealth is increasingly concentrated among the older generations. My favorite anecdote from the mid-2000s was an IT professional at a foreign company who said he earned more in 1 year than his father saved in his entire life. The youth of China have far more power to shape their world than Western youth.


The six cases where companies should stay in the U.S.:
 (1) In the United States especially cattle and the valuation of a particularly high standard companies. For example, it drops fast can obviously be considered to the US market, because over there Uber. But China does not lack is the situation, China's new generation of Internet companies in the United States can not find the particular standard suitable for the company, far more than can be found.

(2) user market, mainly in the United States and Europe. Recently such a company in the field of mobile APP, advertising services, medical equipment and other start up more. They are little known in the country, but in foreign countries either have tens of millions of active users, or there is a long list of illustrious list of clients.

(3) has made a VIE structure, there is the market leader and has a direct strong competitors, need to continue to burn large amounts of financing and the continued breath is not connected to the death. Half of these companies are in competition basic operational capability, half in the Competition financing capacity, while returning home after the demolition VIE is a need to spend time and effort to do, they are almost impossible to stop financing under enormous competitive pressure, another position is difficult to have a breath of luxury.

(4) The potential market value has reached more than $ 100 billion. Although the A-share carrying capacity and mobility are dramatically improved, but the magnitude of billions of dollars today, or perhaps some of the US market is relatively more secure. However, this world is changing fast, and today day trading A-share market has frequently a two trillion yuan, A-share market will not take three years to be able to easily digest one hundred billion US dollars market value of the company's IPO. Perhaps one day, the next generation Uber preferred global capital markets will become China.

(5) because of policies and regulations in the domestic market is not likely in the short term. A typical example is the gambling companies. While living in the gray area of ​​these companies, even in foreign countries will be forced to fight on the market value of a great discount, even dead, but at least there is a glimmer of overseas listing possible.

(6) The core entrepreneurs from judging China's future political and economic environment of big departure, choose from the perspective of global asset allocation of the remaining portion of assets in foreign countries. In this case, in the end go where the listing into a highly personal issue.
For the other cases, going back to the A-share market makes sense:
(1) has a sensitive sector companies (such as internet banking, big data companies, etc.);
(2) Since the situation is difficult to understand people different overseas investment companies (such as Internet Medical, part of O2O, show companies, etc.);
(3) Users and consumers in almost all Chinese companies (such as Internet brands);
(4) Overseas innate low valuation of the company (such as games, media-companies, etc.).
This leads to the next big question, will Chinese valuations hold up?
First, China's economic growth engine being replaced, the transition from investment-led to consumption-led government, the transition from resource-driven to innovation-driven assets. Under such a background, the Government will introduce a series of guiding distinctive policies and regulations to encourage China's most innovative and A shares on behalf of the new economy and the new three-panel market torrents with sinks.

Government for the "Internet + A shares," the distinctive approach will provide support for the domestic capital market is a powerful psychological suggestion, those who are considered to represent the future of the new economy of innovation and the company has been in the A-share market and the new board will be extraordinary, even beyond the normal investment logic and valuation methodology in the pursuit.

Secondly, the "Internet +" will provide A new three-panel market share and create a long-term investment themes, open great imagination for investors.

Given China's huge consumer market and the traditional industries and backward, the Internet (especially mobile Internet) reconstruction of traditional industries in China is happening at a much more frenetic pace than in Europe and America. This concept is not man-made invention Reconstruction hype, but the genuineness of the earth many traditional industries billions of trillions of cheeses.

A leading force in the stock market will gradually shift from traditional industries to new industries, the transfer process is to be opened and released imagination and investment value has been imagined and advance the process.

Third, in the A-share market and the new three-panel, excellent Internet company is relatively scarce, so the real line of Internet companies if the return home, bound to enjoy the scarcity of the high premiums, such a high premium in turn affect other valuation of comparable companies.

Earlier in almost all major segments of the Internet market, almost all front-line companies have chosen VIE structure and overseas capital market, causing extreme thirst domestic market for mainstream Internet companies. We might imagine, if the millet can be listed in the A shares today, assuming its sales ratio of music as today roughly flat sales ratio, then this valuation in the private equity market has more than 40 billion US dollars of Chinese companies, will be A-share market may become the first in the market value of over 1 trillion of new economy companies, directly par PetroChina, ICBC and CCB such giant central enterprises. Such premiums, which in turn become other comparable Internet company's valuation, as latecomers to the extension sky high.

Fourth, the overall quality of China A-share companies is not high, the valuation polarization is inevitable, incremental funding will focus on the growth of the flock to be more innovative company. Past approval system should not lead to a large number of listed companies can be listed, but had a lot of good companies go into exile, the result is now China's A-shares and the new board is basically not so much the stock market, as it is the housing market.

In the A-share listed companies and more than 2,700 new board listed more than 2,400 companies, at least half are waist hung some patchwork no future business of shell companies.

The future market will show the trend of polarization, a large number of value should not have the listed companies will gradually shrink (unless they are changed by the main business restructuring or backdoor), incremental funding will focus on those with growth potential flock to truly represent the future New Economy companies.

Fifth, with the intensification of slowing growth in China and local debt problems, the Chinese government's monetary policy is likely to continue easing, further to stimulate the stock market. At the same time, because the real estate market has been difficult to continue to serve as the engine of China's economic growth role, the extra liquidity will likely enter the stock market, provide strong support for the stock market's high price volatility.

Finally, and very importantly, the real registration system in the implementation process difficult overnight, so A-share premium will be difficult to disappear overnight. Today, the registration system is already imminent. Exchange in order to attract high-quality Internet companies will compete to launch special channels, allowing unprofitable Internet companies listed on its own market. However, these are with the pilot nature. Based on the actual situation of A-share market, the possibility of a one-stop registration system should not, the decision completely to the market will definitely need a process. As long as some form of approval is still, A-share premium will not disappear.

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