Something Shady Is Going On With U.S.-Listed Chinese Companies

U.S. investors in Chinese ADR’s could be getting forced to accept lowball buyout offers. According to a new report by Heng Ren Partners analyst Peter Halesworth, Chinese companies are squeezing out American investors by systematically buying out U.S shares at severely depressed premiums.

In 2015, 38 Chinese companies with shares traded on U.S. exchanges announced buyouts of U.S. investors. Halsworth notes that the premiums paid on these buyouts were about 25 percent lower than the average U.S. buyout premium, and more than half of the buyouts came at sub-IPO prices.

Lower buyout prices alone are not the issue, however. Halesworth explains that these companies increased their cash holdings by an average of six-fold while trading on U.S. exchanges.

“Because of jurisdictional issues and a relative lack of shareholder rights in the offshore tax havens where these companies are domiciled, a regulatory gap exists, leaving U.S. investors little to no recourse to challenge these low offers,” Halesworth adds.

Related Link: Is China Becoming An Even Bigger Player In The World's Gold Market?

He says that once most of these companies have eliminated their U.S. investors, they turn around and offer their stocks on the Chinese markets at much higher prices.

Halesworth notes that recent buyouts of Qihoo 360 Technology Co Ltd QIHU and YY Inc (ADR) YY are two exceptions to the rule and were both fairly priced for U.S. investors.

Disclosure: the author holds no position in the stocks mentioned.