Chinese Stocks Abandoning the Stock Market—There’s a Lot More to Come

Mergers and acquisitions are now taking place among U.S.-listed Chinese stocks, mostly because of their valuations. It was only a matter of time before this started to happen among the “good” businesses; countless Chinese stocks are now entertaining management-led takeover bids.
One company that I feel was never fairly recognized on the stock market was Fushi Copperweld, Inc. (NASDAQ/FSIN). You might even say that among Chinese stocks, the company’s share price just followed the rest of the crowd on the stock market.

Fushi Copperweld manufactures copper-clad bimetallic wire products among other things, offering the industrial Chinese market cheaper alternatives to traditional copper products. On the stock market, the company’s shares were highly successful (and volatile) in 2007 and 2008, hitting $25.00 a share up from $5.00. Then, the stock market declined due to the subprime financial crisis, and the stock was never able to recover, despite the company continuing to grow its revenues and earnings. The company’s stock market chart is below:

Chart courtesy of www.StockCharts.com

This week, Fushi Copperweld will be taken over by Green Dynasty Limited, and delisted from the stock market. Shareholders will get $9.50 a share in cash, as the company’s chairman and CEO takes the company private. This is a trend we are going to see a lot more of in 2013.

We’ve looked in this column at a number of Chinese stocks currently considering management-led takeovers. One potential candidate for this kind of transaction is Lihua International, Inc. 
(NASDAQ/LIWA), which also just so happens to be in the business of copper replacement products in China.

According to the company, its revenues for the third quarter of 2012 grew 54% to $238.8 million, up from revenues of $155.6 million generated in the third quarter of 2011. The company noted that it experienced growth in all product categories, with increased sales volume partially offset by a decline in copper prices. Earnings for the third quarter were $17.2 million, or $0.58 per share, compared to $13.5 million, or $0.45 per share. The company finished the third quarter of 2012 with $130.5 million in cash and cash equivalents, representing $4.37 per diluted share in cash. The company has no debt on its balance sheet.

And yet, on the stock market, the position isn’t doing anything. Lihua’s stock market chart is featured below:

Chart courtesy of www.StockCharts.com

And thus, we have the quandary that is U.S.-listed Chinese stocks. Is the reason that Lihua, and many other Chinese stocks, isn’t doing well on the stock market, due to a lack of confidence in the numbers? For the most part, yes. Institutional investors are gun shy on Chinese stocks, because they’ve been burned before. Therefore, as a group, many U.S.-listed Chinese stocks are substantially undervalued, and this is why management teams are considering taking these companies private.

So far, the marketplace has proven that it takes a lot of courage for speculative investors to participate in Chinese stocks. It’s been a bit of a Wild West environment for the entire group. I do think it’s highly likely that we’ll see a lot more going private transactions among these companies, as their stock market experience hasn’t worked out so well for management or investors. There is a small amount of room in a speculative portfolio to consider Chinese stocks now, especially those that are bouncing off their stock market lows. Diversifying among a small basket would probably be a good idea.