HONG KONG - Private equity firms are working on a series of deals to buy so-called " China orphans" , mainland companies listed in the United States and Singapore, with their stocks undervalued by investors who do not understand their business model or home market.

The deals are pushing ahead even as a series of accountancy and governance scandals in recent months have tarnished the reputation of Chinese companies listed overseas and hammered stock values.

Last week, Bain Capital Partners agreed to buy US-listed China Fire & Security Group for US$265.5 million (S$331.1 million), becoming the first major global buyout firm to close in on such a deal.

A slew of other buyout deals are in the works, including Kohlberg Kravis Roberts' planned bid for Singapore-listed Oceanus, Primavera's privatisation of US-listed Chemspec and PAG Asia Capital's planned buyout of US-listed Funtalk China Holdings.

Meanwhile, Singapore-listed China Animal Healthcare, backed by the Blackstone Group, is in talks with investment banks to list on the Hong Kong Exchange and de-list from Singapore, according to four sources familiar with the matter. Blackstone and China Animal have declined comment.

Such buyouts, known in banking circles as " take China privates" , involve de-listing companies from the US or Singapore and eventually re-listing them in Hong Kong or China to increase their market values. Deal sizes are relatively small but history shows there is a decent upside potential for the right target.

Morgan Stanley Private Equity's (MSPE) de-listing of Sihuan Pharmaceutical Holdings is an example of returns that can be made with the right target. MSPE took Singapore-listed Sihuan private in 2009, identifying a company that required no additional work before re-listing it in Hong Kong last October.

The stock jumped 28 per cent on its IPO, with top-end pricing valuing the company at 26.7 times 2011 earnings.

But such deals are not without significant risks. The head of a leading regional private equity firm gave an example where his company pulled out of a deal when it discovered that the target had hidden unconsolidated shares at a subsidiary and had not disclosed that it had guaranteed loans for the subsidiary.

" I don't see this kind of behaviour anywhere else. I can only put it down to people trying to bury their problems and hoping to deal with them in the future," said the source, who declined to be named because the discussions were private.

Many small and mid-cap firms listed in the US got there through reverse takeovers, while Singapore's small and mid-cap " S-chips" ducked the more stringent requirements on profits and management continuity required by the Hong Kong Exchange.

" There's a reason why some of these companies listed through the back door. It's because they couldn't get in through the front door," said one senior banker whose bank is working on a number of potential buyouts for orphan companies.

Funding for buyouts of Chinese companies is done through an offshore holding company but the risk of non-payment is high and many banks cannot lend on such deals.

Banks have to get comfortable with the risk that the firm will make enough revenue to pay the debt, that it will agree to upstream the money to the holding company, and that Chinese regulators will sign off on the transaction.

REUTERS