MR Capital Sees Opportunities in Chinese Reverse Mergers
There are so much opportunity offered by Chinese reverse mergers or "reverse takeovers (RTOs)," MR Capital Management founder and fund director Mohannad Al-Rashoudi says in a statement.
Mr. Al-Rashoudi, who is also CEO of MR Capital's Cayman-based Global Consumer Loyalty Fund Ltd, advises that due diligence is key before dipping into he described as the "Sino Curse" of RTOs.
"Maybe it's too late to talk about false opportunities in Chinese reverse mergers, but it could actually be too early ahead of the true opportunities. The Sino Curse drove its entire universe down. In general terms, market reaction can well be justified, especially when the subject is accounting fraud and the worst case scenario isn't worse enough," notes Mr Al-Rashoudi.
He says this in reaction to the current impasse between U.S. Securities and Exchange Commission and Chinese regulators about auditing procedures concerning U.S.-listed Chinese companies believed to be involved in fraud.
These alleged Chinese firms are able to fend off U.S. accountants from conducting audits with the powers of the ambiguous Chinese law forbidding the disclosure of "state secrets."
According to Mr. Al-Rashoudi, this stalemate should be resolved quickly and added that no company should cover anomalous trading and use sovereignty to hide their insufficient financial transparency.
Because U.S. accounting firms are barred from opening their own auditing offices in mainland China and are required to hire local affiliates when practicing in Beijing, American investors have avoided these Chinese RTOs.
This creates an opportunity for learned investors and fund managers, says Mr Al-Rashoudi adding that the current mispricing on Chinese reverse merger companies is a general market reaction to the issue.
"It is not a normal mispricing situation. It is a mispricing in value of growth and quality companies. This could be a great opportunity," he points out.
The alleged scam has completely damaged some of these U.S. traded Chinese firms. But the MR Capital executive insisted that all that are needed are transparency and more compliance aside from conducting extensive due diligence.
A reverse merger - also called a reverse acquisition or reverse takeover - allows a private company to go public while avoiding the high costs and lengthy regulations associated with an initial public offering. To do this, a private company purchases or merges with an existing public company, installs its own management and takes all the necessary measures to maintain the public listing.