As Chinese securities regulators keep a lid on initial public offerings (IPOs), backdoor listings are once more becoming a popular method for domestic companies to tap the capital market.
The latest such deal was announced Monday by Shenzhen-listed Jiangsu Dongyuan Electrical Group Co. According to a statement filed with the Shenzhen Stock Exchange, the company will merge with Shandong Runyin Biological Chemical Co, a subsidiary of Shandong Ruixing Group, one of China's largest chemical fertilizer producers. After the deal is complete, Ruixing will become the controlling shareholder of Dongyuan, which will subsequently be transformed from an appliance maker into a chemical company.
The past week alone has also seen several similar transactions. Last Monday, a deal was reached between Dechang Houdi Rare Earth Mineral Industry Co and Shanghai-listed China-Kinwa High Technology Co, which will see the former inject 100 percent of its assets into the latter. The following day, Shenzhen-listed China Resources Jinhua Co declared that it had reached a restructuring agreement with Skyworth Digital Holdings Limited, which could result in the listing of Skyworth's digital unit. Wednesday also saw Shanghai-listed Shanying Paper Industry Co disclose its intentions to take on the assets of paper industry peer Ji'an Group Co.
Once relatively commonplace, backdoor listings became quite rare after the China Securities Regulatory Commission (CSRC) loosened IPO approval procedures and also upped its criteria for backdoor listings. In late 2011, the commission required companies pursuing such a listing strategy to have been in operation for three consecutive years and have earned a collective net profit of 20 million yuan ($3.22 million) over the two previous financial years.
Backdoor procedures are making a comeback now because regulators essentially ceased approvals on IPOs last summer, Li Bo, an analyst from GF Securities, told the Global Times.
China's A-share markets have not seen a new listing since November 2012 and it is unclear when the CSRC will resume approvals on new capital market offerings. Currently, there are around 900 candidates in the IPO pipeline waiting for an official pronouncement on their listing plans.
"Backdoor listings are a good alternative [to get listed] at times when IPO approvals are suspended," Li explained.
According to figures from iFinD, a financial data provider, around 870 merger and acquisition (M&A) deals involving listed companies have been recorded so far through the year-to-date, roughly double the number seen during the same period last year.
Meanwhile, the encouragement of local governments has been viewed as another driving force behind the M&A surge, Cai Junyi, chief investment consultant from Shanghai Securities, told the Global Times.
"These shell companies are mostly weak in terms of profitability, and many are themselves in danger of being delisted under harsher delisting rules from exchanges. However, listed companies are scarce resources and local governments usually don't want to see them go to waste. So they tend to support backdoor listings as a way to put these shells to some useful purpose," Cai said.
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