SINA's (SINA) stock recently rallied after the Chinese tech company agreed to be taken private by New Wave Holdings, a company controlled by SINA's CEO Charles Chao, in a $2.59 billion deal. SINA's investors will receive $43.30 in cash per share after the deal closes, representing a higher offer than New Wave's initial bid of $41 per share in early July, and the stock will be delisted from the Nasdaq.
SINA's go-private deal might seem reasonable given the escalating trade tensions and the passage of a U.S. Senate bill that could delist U.S.-listed Chinese companies unless they comply with new regulations. But it will likely hurt SINA's American investors since it significantly undervalues the company and casts a dark cloud over other U.S.-listed Chinese companies with similar ownership structures.
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Why does New Wave's offer undervalue SINA?
New Wave's $2.59 billion offer values SINA at just 14 times forward earnings and just 1.2 times this year's sales. SINA also held $2.6 billion in cash, cash equivalents, and short-term investments at the end of the second quarter -- which is slightly higher than New Wave's bid.
Moreover, New Wave's bid doesn't properly value SINA's stake in Weibo (WB 3.73%), the social network it spun off in 2014. SINA currently owns about 45% of Weibo, which has an enterprise value of $7.6 billion, and a majority voting stake in the company. Weibo's forward P/E ratio of 15 is also near a historical low due to a slowdown in its core advertising business.
Investors can't block the deal
New Wave's slightly higher bid merely seems like a formality, since it already held a 12% equity stake and a 58% voting stake in SINA prior to the initial offer. Several other Chinese companies, including Qihoo 360 and Jumei International, have gone private in similar CEO-led go-private deals, which are impossible for investors to block.
These deals also highlight the fact that U.S. investors never had any real voting rights in these companies. When SINA went public on the Nasdaq 20 years ago, it did so as a VIE (variable interest entity) -- a holding company that held private shares of SINA and wasn't based in China.
VIEs are owned by Chinese citizens and circumvent Chinese regulations barring certain sectors -- including technology and education -- from foreign direct investments. Therefore, U.S. investors really only buy stakes in holding companies, often based in the Cayman Islands, which don't include any direct voting rights. That's why Aristeia Capital's activist challenge against SINA's board in 2017 ultimately failed.
SINA introduced VIEs to the U.S. market, and most Chinese companies now adopt this ownership structure. In other words, other major Chinese companies -- including Weibo -- could follow SINA's lead if the U.S.-China trade war escalates.
Could SINA relist in China?
Many Chinese companies that previously delisted their U.S. shares by going private -- including Qihoo 360, Mindray Medical, and Wuxi Pharmatech -- subsequently went public again in China at several times their original valuations in the U.S. SINA could follow that route, which would raise a lot of fresh cash but leave its U.S. investors out in the cold.
Investors should recall that several top U.S.-listed Chinese companies, including Alibaba, NetEase, and JD.com, recently launched secondary IPOs in Hong Kong. These companies aren't planning to delist their U.S.-listed shares anytime soon, but their Hong Kong listings could help them stay public in case new regulations force their stocks off the NYSE and Nasdaq.
The key takeaways
The SINA saga highlights three key risks of owning Chinese ADRs: the VIE structure doesn't grant U.S. investors any direct voting rights in the companies, the founders often hold super-voting shares, and the ownership structure allows companies to delist their shares and retreat back to Chinese exchanges to raise more cash.
I own a small position in SINA, which will now be sold at a loss, along with positions in several other major Chinese tech companies. SINA's retreat won't convince me to sell all those other stocks right away, but I might trim those positions if tensions between the U.S. and China worsen. For investors who still want to invest in Chinese companies, directly buying those stocks on Chinese exchanges might be preferable to buying the wobbly ADR shares.
