SINA (NASDAQ:SINA), one of China's oldest internet companies, lost nearly 60% of its market value over the past 12 months over concerns about its slowing growth and the escalating trade war with the U.S. Its revenue rose just 8% year over year last quarter, marking its slowest growth in three years, and indicated that its core ad business was struggling with the economic slowdown in China and competition from rival platforms.
Those headwinds are SINA's biggest near-term threats, but investors should be aware of another hidden risk: the possibility of SINA delisting its Nasdaq shares and relisting them on a Chinese exchange. U.S. lawmakers recently proposed a bill that would require U.S.-listed foreign companies to open their books to American auditors, and the proposal could convince companies like SINA to consider leaving U.S. investors behind.
The bill has bipartisan support, and companies that reject U.S. audits could be forced to delist their shares. The law would go into effect in 2025 and be enforced after a three-year grace period. Only two countries, China and Belgium, currently bar the U.S. Public Company Accounting Oversight Board from auditing their companies.
China is likely reluctant to permit U.S. audits due to the number of state-backed enterprises listed on U.S. exchanges. Beijing owns more than 30% stakes in nearly a dozen U.S.-listed companies, and opening their books could reveal sensitive information about the government's finances.
How could this bill impact SINA?
SINA isn't one of those state-backed enterprises. However, U.S. investors are still barred from directly owning stakes in SINA, since China bans foreign investment in sensitive sectors like internet and education companies. Instead, U.S. investors buy shares of an offshore holding company (owned by Chinese citizens) that holds equivalent stakes in SINA.
This ownership structure, known as a VIE (variable interest entity), is controversial because it doesn't guarantee a U.S. shareholder any rights. When activist investor Aristeia Capital challenged SINA nearly two years ago, analysts questioned if the fund's 4% stake in the VIE shares actually gave it any bargaining power -- since Chinese courts could nullify those challenges.
Nonetheless, SINA addressed Aristeia's grievances at a shareholder meeting and let U.S. investors vote on the fund's proposals. Those proposals were struck down, but the vote indicated that SINA -- which popularized the VIE structure and opened the floodgates for other similar Chinese listings -- didn't want to scare away its U.S. investors.
However, SINA's stock has tumbled in recent quarters, and the escalating trade war is tempering hopes for a meaningful turnaround. Over the past few years, dozens of other Chinese companies -- including internet security firm Qihoo 360, medical device maker Mindray Medical, and Wuxi Pharmatech -- all raised capital through U.S. IPOs, went private, delisted their stocks, then filed new IPOs in Chinese markets at several times their U.S. valuations.
Those moves left many U.S. investors behind. Qihoo 360, for example, was taken private at $9.3 billion in 2016. It went public in Shanghai two years later with a valuation of $62 billion. Mindray went private at $3.3 billion and reemerged in Shenzhen with a $22 billion valuation after its October 2018 IPO, while Wuxi went private at $3.3 billion and went public through two separate listings in Hong Kong and Shanghai in May 2018 for a combined valuation of nearly $22 billion. SMIC, the largest chipmaker in China, also recently decided to delist its shares from the NYSE.
Could SINA follow those companies' moves?
SINA currently has a market cap of less than $3 billion, while Weibo (NASDAQ:WB) -- in which SINA owns a majority voting stake -- has a market cap of about $9 billion. The near-term prospects for both companies look grim right now, and the new proposal for allowing U.S. audits makes the U.S. market even more hostile for Chinese stocks.
Even Alibaba (NYSE:BABA), which owns a significant stake in Weibo, is gearing up for a second listing in Hong Kong to raise fresh capital. Therefore, it's reasonable to assume that SINA's management has at least considered going private and relisting its shares on Chinese exchanges. If that happens, its tender offer could be well below its 52-week high of $94 -- which means a lot of investors could be left with big losses.