Strategic trade
Trade view / 20 July 2015 at 23:00 GMT

Qihoo's privatisation bid back in focus

China Watcher / Shanghai
Instrument: QIHU:xnys
Price target:
Market price:

As Chinese equity markets were riding high in May and June, a wave of US-listed Chinese firms announced buyout bids, with the intention of relisting in China to take advantage of the high valuations. 

The biggest of these privatisation bids is tech firm Qihoo, which announced a $10 billion buyout bid on June 17. However, the state of all these bids is in doubt since Beijing cracked down on margin trading, and domestic indices fell more than 30% over the space of a few weeks. The share price of these firms understandably fell, but as China’s financial markets have been stabilised on the shoulders of the government, the outlook for the bids should begin to look more positive.

After the 30% decline in Chinese equities, the government began implementing measures to stabilise the markets, at the expense of its credibility. It has also gone back on its margin trading crackdown, and subsequently domestic markets have rallied as margin lending has increased. This is a key point, because a lot of the doubts over the buyout bids were based on fundraising in China. 

It is assumed that these bids are based on the ability of management to raise capital in equity markets, which is affected by margin volumes. The crackdown at the end of June raised serious doubts about these deals, but as margin lending grows, these doubts should subside. I expect that these companies are waiting to see whether stability has returned to the domestic Chinese markets before making a final decision. 

On Friday, I will discuss the potential role of the government in these buyout bids, but the key point is that after all of the interventions to prop up equity markets, having a wave of US-listed Chinese companies scrapping their privatisation bids would be detrimental to the progress of Chinese capital market reform. I expect that the increase in margin lending will help to fund Qihoo’s buyout bid.

At the time of the buyout bid, I made a case for buying Qihoo, because there was a $7 premium to be made. Since that report, the decline in domestic equities has seen US-listed Chinese firms suffer, as Qihoo closed last night at $62.77, which still represents a decline of 10.5% since after the deal was proposed, and a buyout premium of 22.7%.

 Qihoo's share price since its IPO
Qihoo's Stock Price Since Its IPO
Source: Stockcharts. Create your own charts with Saxo Trader; click here to learn more. 

Management and risk description

The reality is that it is unknown when Qihoo will make an announcement on its buyout bid, as other firms have released very little public commentary about their respective bids. It is likely that firms are waiting for stability to remain in domestic equity markets before we see decisions being made, which is the correct course of action, given the market volatility over the past month in China.

The firm is also likely to release its second-quarter earnings at the end of August, when management will most likely comment on the ongoing privatisation bid. The earnings release is likely to cause higher volatility than usual for Qihoo, so investors should be prepared for this, particularly given that the buyout bid will amplify this volatility.


Entry: $62.77

Stop: $58

Target: $77

Time Horizon: Three months

— Edited by Gayle Bryant

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Non-independent investment research disclaimer applies. Read more


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