There is much anticipation for e-commerce company Alibaba’s expected initial public offering in New York later this summer, though 2014 has been a mixed bag for Chinese tech stocks thus far. What is the outlook for Chinese IPOs and what is still bringing them to the US market?
Many recently-listed Chinese companies have had a poor run in the past few months. Chinese internet retailer Dangdang Inc., as well as Youku, Tudou and Renren have all seen serious slumps throughout March and April, with the latter losing 85% of its value since going public three years ago. On the other hand, some more established Chinese companies have had stocks hold stable, including Baidu and Tencent,
These few months are especially busy as many companies will try to go public before the Alibaba opening. Earlier this week, JD.com successfully opened to the public above the expected price range at $19 a share. This follows Weibo’s less fruitful IPO in April, which priced at the lower end of its expected range shortly after its parent company, Sina, went through a massive share buyback.
Despite the cooling off of the Chinese tech share boom in the first quarter, the more important consideration is the IPO itself—a major success for a company in its pursuit of capital and future expansion. Therefore, the continued choice by Chinese companies to IPO in the US is clearly an indicator that this is still an easier route to capital than by listing domestically. As a result, New York Stock Exchange executives predict 15-20 Chinese firms will list there this year, up dramatically from six companies last year and only two in 2012.
Significant Chinese IPOs this year:
Jumei- online cosmetic retailer. Jumei listed in May at $22 an ADS for a total offering size of about $245.1 million. Founded in 2009, Jumei is China’s largest online beauty retailer with 22% of the domestic market.
Tuniu.com- online tour booking website. The Nanjing-based company fell below its initial public offering price in the first few minutes of trading on May 9th in the NASDAQ market, raising about $72 million.
Zhaopin- career portal. This Chinese online job-market operator was founded in 1994 and has 74 million registered users. Zhaopin filed for an IPO under the ticker symbol ZPN in early May.
Xunlei.com- tech company. Xunlei offers downloading services and digital media streaming services and cloud computing platforms. The Xunlei IPO will involve 7.6 million shares priced at $14 to $16 per share for a company value of $114 million to $120 million. The company originally filed to open on the NASDAQ in July 2011 but ultimately postponed.
Other Chinese companies reportedly contemplating IPOs in the US this year include Meituan (group-buying website), Vancl (clothing e-tailor), Chukong (mobile gaming), and Tarena (IT training).
Why Chinese Companies IPO in the US
China is now in its third major wave of companies going public with this generation focused on China’s booming online shopping and mobile communications markets. With their own domestic economy the fastest expanding in the world, why are Chinese tech companies still choosing to IPO in the US? Opening to the public on the US market may seem like an obvious choice to gain more investors and a global reputation. However, several major Chinese companies’ CEOs have recently said that they would in fact prefer to IPO in China, but there are several factors pushing them abroad, rather than the US market pulling them in.
Mainland China now has two stock exchanges - the largest in Shanghai with a secondary exchange in Shenzhen, as well as a more internationalized bourse in Hong Kong. However, many Chinese companies are pushed away from listing domestically due to the difficulties of doing so.
One major reason is Chinese stock exchanges’ entry requirements are still too high and too lengthy for many companies. In order to list on the Shanghai or Hong Kong market, a company must have been profitable for three years already, whereas both the New York stock exchange and NASDAQ offer an option to qualify for listing based on assets, shareholders equity and market capitalization only.
Chinese companies who can meet domestic requirements must then go through a long, opaque process compared with the US’s straightforward filing, discouraging many from attempting to list domestically.
Companies that manage to overcome the hurdles of qualifying to list in Shanghai or Hong Kong, and make it through the lengthy process, then find that overregulation prohibits growth. China’s regulatory agencies greatly benefit the security of stockholders, but to the disadvantage of listed companies’ profits. Chinese firms face limits on daily gains and losses on stock prices that is not the case in the US.
In some ways, companies also face more restrictions in their operations when listed in China, such as Alibaba, which also reportedly chose to list in the US over Hong Kong because Chinese regulations would have lessened the company’s choice over its board of directors.
Finally, the Chinese market requirements are so focused on maintaining domestic integrity as to prohibit many of China’s own companies due to international ties. Chinese companies with prior foreign investment or foreign banking accounts are not eligible to list in China. Additionally, the Chinese stock market restricts foreign stock trading on its A shares stock market in Shanghai.
For these reasons, Chinese companies are reluctant to list on their own domestic stock markets.
Domestic Markets and SOEs
If China’s domestic stock markets are not receiving many of the large companies who choose to IPO in the US instead, then who is listing in Shanghai?
The Shanghai stock exchange is the fourth largest in the world in terms of market capitalization but the majority of its stock is still from current or formerly state-owned companies.
Over the past year, Beijing has clearly been manipulating entry to domestic stock exchanges, with a 14-month freeze on IPOs, leading to a backlog of almost 800 companies requesting to go public. This has recently been lifted and shortly followed by a flooding of the market with billions of dollars in new preferred shares by big publicly-traded state-run enterprises. This development is a result of recent government reforms that allowed such fund raising as a kind of back-door stimulus package (as the major investors in these new stocks are also state-owned, thereby simply shuffling money around in the state-connected system).
The top five largest stocks on the Shanghai exchange are state-owned enterprises, with many more having close state affiliations.
Foreign investment makes up a small fraction of the Chinese stock market. Despite years of announcements by the government that foreign companies will soon by allowed to issue shares on the Shanghai market, this is still not allowed.
Foreign investors currently buy Chinese stocks and bonds through the Qualified Foreign Institutional Investor and the Renminbi Qualified Foreign Institutional Investor programs. Stocks are offered as B shares in foreign currencies, while Chinese investors buy A shares in renminbi.
Earlier this month, the Shanghai Exchange announced it would ease restrictions on overseas investors, allowing foreign investors to collectively own up to 30% of a single company (up from 20%, capped at 10% per individual investor). However, this is considered largely a symbolic move as its unlikely this percentage would be reached.
The first quarter of this year has had significant shifting in the Chinese stock exchange with the lifting of the IPO freeze and an upsurge in offered premium shares by major companies. However, these moves only reinforce the notion that the exchange is simply another government tool in the state-manipulated financial system. Additionally, the changes made toward foreign investment are fairly meaningless while real changes, such as foreign shares being issued, have still not materialized.