Earlier this month Nanning Baling Technology Inc., a ten-year old Chinese high-tech company involved in the research and manufacture of copper and aluminum tube-fin heat exchanger products withdrew its IPO. Nanning Baling had planned to sell nearly 19 million shares to raise about $46 million on the Shenzen exchange. But the company’s failure to attract the required number of financial institutions doomed the IPO. Does this mean investors’ love affair with Chinese IPOs is finally over?
“Another wave of Chinese IPOs is hitting the U.S. equity market, but this time many U.S. investors are staying dry,” reports Renaissance Capital, a global IPO investment advisory firm based in Greenwich, Connecticut. “The reasons for this growing aversion are several, but paramount among them are evidence of actual fraud at a handful of companies, skepticism about business models and growth rates, inadequate financial controls and opaque financial disclosures,” adds Renaissance. Suddenly, Chinese IPOs have become one of the worst performing groups in the U.S. IPO market, which furthers investor avoidance of the sector.
China IPOs had a great run until recently. In 2010, 40 Chinese companies were listed on U.S. exchanges. He Zhaofeng, partner and Greater China IPO Leader with Ernst & Young, predicts that the number could exceed 60 in 2011. "The global IPO market has rebounded in the wake of the financial crisis. With the burgeoning recovery and China's economy maintaining its headlong charge, it's a sure thing that more Chinese companies will seek IPOs globally, and especially in the U.S.," noted He in an interview with the China Daily.
The successful listings of companies such as Youku.com in 2010 encouraged more Internet and high-tech companies to seek IPOs in the country this year. "Similar companies will believe that if their peers can do it, they can too. They will also seek funding through the IPOs to keep up with their competitors, who have already listed in the U.S.," He told China Daily. Ironically, Chinese companies find it easier to list on the U.S. exchanges than on the Chinese exchanges whose listing requirements are seen as far more demanding and restrictive.
The Chinese offerings have been attractive because they offer the promise of growth, in much the same manner that U.S. high-tech offerings did in the 1980s and 1990s. “Investors looking for growth will go anywhere they can get it,” says Miriam Schmitter, managing director of Cambridge Associates. In spite of the riskiness of IPOs in general and Chinese IPOs in particular, investors are unmindful of the risk, “especially because yields have been so low in the fixed income sector,” adds Schmitter.
Still, investors are beginning to question how real these Chinese companies are, says Trent Tillman, president and co-founder of Syndicate Trader, a San Francisco investment advisory firm that specializes in emerging growth companies. A flurry of disclosures about fraudulent financial statements, as well as a slew of regulatory sanctions – a series of delistings of Chinese companies on a number of exchanges – has shaken investor confidence. More important, the IPOs that have gone public in recent months have performed poorly in the aftermarket.
Renren (RENN), one of China’s largest social networking companies, went public early May and the shares soared nearly 30 percent above the offering price of $14 per share. But the company’s admission that it had found a "material weakness" and a "significant deficiency" in its internal financial controls did not help. On Monday, June 20, the stock closed at $7.59 — almost half off its IPO price.
When another highly touted Chinese company, Dangdang — China’s version of Amazon.com — went public in December 2010, its shares rose 87 percent above the offering price of $16. Dangdang stock has dropped after its initial surge and on June 20, the stock closed at $12.25, almost a quarter off its IPO price.
Given the uncertainty around the stock market, many analysts felt that the June IPO of Taomee Holdings (TAOM), which operates one of the largest online portals for children, would prove to be a bellwether offering. On June 9, Taomee went public at $9 a share, at the lower end of the $9-$11 early indications. It closed June 20 at slightly under $10, giving the company a market value of $362 million.
While it is true that some of the news about Chinese companies is scaring off investors, the entire digital media sector has investors in doubt. “There is a correlation between demand for Chinese IPOs and the overall interest in digital media,” says Schmitter of Cambridge Associates. And because investors see the real growth coming from companies in the emerging markets, they aren’t reluctant to invest in Chinese IPOs that are raising capital for growth, explains Schmitter.
