In 2015, around 30 Chinese firms announced plans to delist from the US stock markets, claiming they have been valued too low in the US. Meanwhile, China's stocks markets have been rolling out the welcome mat for Chinese companies listed overseas. On February 17, online beauty product retailer Jumei International Holding announced its plan to delist from the New York Stock Exchange. The announcement upset some of the company's current shareholders, who have complained that the $7 American depositary share price is unfairly low. Although Jumei's management and the rest of the buyer group have not violated any rules by setting such a price, analysts said that the deal may undermine investor confidence in Chinese companies currently listed in the US and those that go public there in the future.

Jumei International Holding CEO Chen Ou, third from right, joins in the applause after ringing the opening bell on the New York Stock Exchange on the day of his company's IPO on May 16, 2014. Photo: IC

On February 17, New York-listed Jumei International Holding announced that it has received a non-biding "going private" proposal from the company's management and other major shareholders, adding another case to the string of Chinese firms that are rushing to leave the US stock markets.

The buyer group, made up of CEO Chen Ou, co-founder Dai Yusen and a group of funds run by the US venture capital firm Sequoia Capital, has offered to acquire all of Jumei's outstanding ordinary shares - around 45.6 percent of the company's total shares - for $7 per American depositary share.

However, the proposal has angered small investors, who said that the offer is too low, considering that the online beauty product retailer's issue price was $22 per share when it went public on the New York Stock Exchange in May 2014.

 The outraged investors also said that the company's stock has traded for far more than $7 a share since the IPO.

Sell high, buy low

Many Chinese firms have vowed to go private over the past year or so. In 2015, around 30 firms, including social dating app Momo and networking site renren.com, announced plans to get delisted from US stock markets, according to Global Times calculations. But few of these cases have been as controversial as Jumei's privatization proposal.

A group of over 150 investors of Jumei stocks have formed a group on social networking app WeChat, discussing the possibility of suing Jumei, news portal sohu.com reported Tuesday.

In the statement released on February 17, Jumei said that the price of $7 represents a premium of 26.6 percent above the average closing price over the last 10 trading days.

But Zhong Rixin, investment director at imeigu.com, a US stock market information provider, said  the $7 offer is very low once one considers the company's historical prices and growth potential.

Jumei's shares traded at an average price of $20.64 during the period between its IPO and the date when the privatization plan was announced, Zhong said.

"Jumei's recent low stock price is part of the global rout, thus it is unreasonable to set the privatization price based on its recent performance," Zhong told the Global Times on Sunday.

Also, unlike other e-commerce sites, most of which are still generating losses, Jumei was profitable for 13 consecutive quarters before reporting a net loss of 86.9 million yuan ($13.31 million) in the third quarter of 2015.

Jumei's growth potential and sound balance sheet are more evidence that the offer undervalues the company, Zhong said.

Jumei is not the only company floating privatization proposals that offer to buy shares at a steep discount.

In its plan to go private, renren.com offered investors $4.20 in cash per American depositary share, far less than its issue price of $14 per share. But renren.com's offer didn't raise much investor ire because the company doesn't show nearly as much growth potential as Jumei, Zhong noted.

An employee at Jumei's investor relations department declined to comment on the matter when contacted by the Global Times on Tuesday.

Within its rights

According to the February 17 statement, the buyer group and its affiliates own approximately 54.4 percent of Jumei's issued and outstanding ordinary shares, which represent approximately 90.1 percent of the company's aggregate voting power. Consequently, the proposal is very likely to go through, analysts said.

The buyer group has the law on its side. Under the law governing companies incorporated in the Cayman Islands, such as Jumei, management-led buyer groups have a major say in setting buyback prices because management tends to hold a controlling stake, Liang Jian, CEO of iMeigu, wrote in a post on Friday on xueqiu.com.

But Liang noted that the rule is a loophole that ought to be closed to protect shareholder interests.

Hao Junbo, a lawyer at the Beijing-based Hao Law Firm, told the Global Times on Monday that investors are entitled to sue a company if they believe the privatization price is unfair, and such cases have gone to court in the past.

However, in the Jumei case, the lawsuit need to be filed in the Cayman Islands, where Jumei is incorporated, which makes it more difficult for small investors.

Analysts said that Jumei's proposal is just another case of selling high to investors and then buying back low, which may undermine US investors' confidence in Chinese stocks.

"US investors will be more cautious about buying Chinese stocks," Zhong said.

Despite the mainland stock markets' recent measures to attract Chinese companies, the US stock markets remain a desirable destination for Chinese companies looking to go public. By upsetting investors, the privatization of Jumei may make it harder for Chinese companies to drum up investor interest in the US for future IPOs.   

Coming home

It used to be hard for firms incorporated in the US or the Cayman Islands - most Chinese Internet firms fall into this category - to float on the mainland stock markets, but the government changed the rules in 2015 to encourage growth of homegrown Internet firms.

Jumei did not say whether it would seek a domestic listing, but analysts believe that it is likely the company will do so, given the impressive performance of Internet firms that have landed on the mainland markets.

One notable case is Beijing Baofeng Technology Co. The entertainment service provider, which failed to launch an IPO in the US, turned to the Shenzhen exchange in March 2015. Its share price has rocketed over 900 percent since.

Cao Peikun, research director at Internet consultancy Analysys International, noted that favorable policies and the high price-earning ratios of mainland stocks will cause more Internet companies to leave Wall Street.

"There will be another round of privatization of Chinese firms after Jumei," Cao said in an e-mail sent to the Global Times on Tuesday.
Newspaper headline: Leaving Wall Street