The pace of US listings from China’s internet sector has stalled in the wake of a series of corporate governance scandals. After Facebook’s disappointing debut, hopes of a revival are fading fast.
Source: Reuters/David Gray
A recyclable materials collector stands in front of her overloaded tricycle on a main street in central Beijing
Internet companies in China are finding it harder than ever to go public in the US. Only one firm from the sector has listed there since late last August. The Facebook fiasco, where the world’s biggest IPO of 2012 plunged as much as 33% below its IPO price, has further dampened any hopes for a re-emergence of Chinese internet listings in the US.
Chinese internet IPOs were, until recently, top picks for US investors as nothing else was able provide comparative returns, despite listing at eye-popping valuations. The whopping gains of 161% and 57% that internet television platform Youku.com and social networking site Renren registered on their trading debuts, respectively, are still fresh in the minds of many.
However, the listings of Chinese companies in the US have come to a screeching halt in the wake of the scandal surrounding Sino-Forest, the Toronto-listed timber company that was hit by allegations of fraud in mid-2011. Growing concerns about corporate governance at PRC entities and a revaluation of the internet sector have put a stop to such IPOs.
In the first five months of this year, the total IPO proceeds of Chinese companies from the US tumbled about 95% from the US$1.4bn raised in the same period last year.
Since last August, only one Chinese IPO managed to cross the finish line, but at a price. In March, online discount retailer Vipshop raised US$84m from its New York IPO in the first – and only – Chinese float in the US this year, after pricing the deal 23.5% below the low end of the marketed price range.
The company has traded below water since its listing. On June 26, its share price closed at US$6.15, down more than 5% from its IPO price.
Several Chinese entities, including online social commerce company LaShou Group, Xunlei Technology, a consumer internet platform for digital media content, and China Auto Rental, did brave the market with US listing attempts in the past few months, but all bit the dust.
Bankers working on US listings acknowledge that market conditions are getting worse, and that the window for IPOs this year will be limited.
“The global economic outlook continues to be challenging and the long-awaited rebound has yet to materialise. No one can predict exactly when the situation will turn around. I believe many Chinese companies will wait until next year, when risk appetite for IPOs is likely to come back,” said J West Riggs, head of Asia ECM at Piper Jaffray.
“Many Chinese internet companies have yet to turn profitable. US investors still need time to rebuild confidence and cultivate interest in China’s internet issuers,” he added.
Some Chinese internet companies had hoped social networking site Facebook’s listing in May would rekindle the enthusiasm of investors. The aftermarket performance of the much-hyped IPO, however, has been disappointing. At the time of writing, Facebook shares had fallen 15% since listing.
The Facebook fiasco has seen the hopes of Chinese companies for US listing evaporate, prompting a few, mainly from the internet sector, to shelf such plans completely for now.
“Many Chinese internet companies have yet to turn profitable. US investors still need time to rebuild confidence and cultivate interest in China’s internet issuers”
LaShou Group on June 20 withdrew its application for a Nasdaq listing of up to US$80m, becoming the latest Chinese company to do so after Xunlei Technology, Royalty Alliance, China Auto Rental and Cathay Industrial Biotech, withdrew their applications.
“We were monitoring the market and had planned to push ahead with a Chinese deal after Facebook’s listing,” said an ECM banker.
“Investors have been looking for positive information on IPOs. If Facebook had done well, it might have helped IPOs, but if it did not and was definitely the last straw. Now, we are looking at a post-summer window, he added.
Glimmer of hope
Despite the negative sentiment hanging over the internet sector, some Chinese issuers are still keen to try to go public this year.
Jingdong Mall, better known as 360buy.com, held an analyst briefing in Hong Kong in late May, a sign that it is pushing ahead with its US$2bn-$3bn US IPO. It will be China’s biggest internet listing, if it comes to fruition.
“Companies with bigger revenues and larger business scales have better chances of getting listed, bu profitability remains the key,” said Piper Jaffray‘s Riggs. “The pricing would have to be very reasonable and attractive when compared to peers.”
The US enactment of the JOBS Act in March is good news for some small-sized enterprises, as it eases regulatory burdens for emerging growth companies with annual revenues of less than US$1bn. It includes expanding crowdfunding opportunities – investments by groups of small investors, often through websites – and increasing mini-offerings.
“The SEC returned to the status that smaller companies can privately submit listing materials before they publicly begin premarketing deals. This rule will provide enough time for smaller issuers, most of which are internet companies, to prepare well prepare and revise prospectuses as per regulatory requirements, before professional investors and researchers put forward their questions,” said a partner at a law firm in Shanghai.
Chinese internet companies lining up for US listings include online publishing company Cloudary (US$200m), internet advertising platform AdChina (US$100m), Chinese online job search services provider Zhaopin.com (US$200m), internet security products maker Sangfor Technologies (US$100m) and online video services provider PPStream (US$300m).
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