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State bank funding to help major firms go private

By ARIEL TUNG (China Daily)

13:13, August 13, 2012

While Chinese stocks struggle to attract US investors, private-equity groups are seeking to buy out some of these companies with funding provided by State-owned China Development Bank.

Frustrated by their low valuations, recently delisted Harbin Electric Inc and Nasdaq-listed Fushi Copperweld Inc have turned to Abax Global Capital, a Hong Kong-based asset manager partly-owned by Morgan Stanley, in an attempt to go private.

Shares of US-listed Chinese companies have been hit hard by accounting scandals fueled, at least in part, by short sellers such as Muddy Waters LLC over the past two years.

While most Chinese companies haven't been accused of wrongdoing, the value of Chinese stocks has plummeted on the US stock market. The 180 Chinese companies that have issued securities on foreign exchanges since the start of 2010 are trading on average 21 percent below their offer prices, according to data compiled by Bloomberg News. The 82-stock Bloomberg Chinese Reverse Mergers Index has lost an aggregate 25 percent since August 2011.

There are 129 US-listed Chinese companies trading at an average of eight times their estimated 2012 earnings per share, compared with a ratio of 11 times EPS for 276 Chinese companies that trade on the Hong Kong exchange, according to data compiled by Citigroup Inc.

"If you can distinguish between a good company and a company that has issues, you can do very well investing in China," said Kevin Pollack, a fund manager at Paragon Capital LP in New York.

Abax, which manages $900 million in assets, started a $300 million fund this year to invest in US-listed Chinese companies.

In November 2011, Harbin Electric, a maker of electric motors in northeastern China and listed on Nasdaq, went private in a buyout by Abax and Yang Tianfu, Harbin's CEO, that was financed with a $400 million loan from the Hong Kong branch of China Development Bank, or CDB.

Yang and Abax each owned about 41 percent of the company's outstanding shares before the deal; the split now is Yang, 75 percent stake, and Abax, 25 percent.

On June 28, Abax said it had reached a deal to take over Fushi Copperweld, a Dalian-based manufacturer of copper wire and related products, along with the company's CEO, Li Fu.

The $9.50-a-share offer, which Fushi's board of directors approved, represents a premium of 21 percent above the stock's closing price on the day the deal was announced.

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