Sparse US Listings Prompt Rush on China IPO’s
Last April, when global financial markets were collapsing, a Chinese Web site named Sohu.com made a bold move to spin off its online gaming unit and list it on the Nasdaq Stock Market.
The bet paid off: Changyou.com, the unit, became one of the year’s most popular I.P.O.’s, setting off a flurry of Chinese stock offerings that raised more than $55 billion and turned China into the world’s No. 1 source of companies going public.
With that kind of money up for grabs, Wall Street investment banks, in one of their worst dry spells for I.P.O.’s, are scrambling to get more business from China, despite the risks of buying shares of Chinese companies and growing concerns that a bubble may be forming in Chinese listings.
The New York Stock Exchange and the Nasdaq, where the number of I.P.O.’s withered last year from hundreds a decade ago, also are stepping up plans to lure even more Chinese listings to the United States from exchanges in Hong Kong and Shanghai.
“Last quarter was one of the busiest quarters in years,” Robert H. McCooey Jr., who is in charge of new listings at Nasdaq, said of Chinese listings. “And my sense is we’ll have another strong year this year.”
Global private equity companies, Silicon Valley venture capitalists, New York hedge fund managers and global investors are setting up joint ventures with the Chinese government or finding other means to vie for a piece of what the American investor Wilbur L. Ross Jr. called “the China miracle.”
Over the last five years, Chinese companies have raised about $210 billion globally through initial public offerings, according to Dealogic, which tracks global initial public offerings. American companies, by contrast, have raised $184 billion, Dealogic said. The global economic crisis sharply cut the number of new listings in the United States and around the world last year, with the exception of China: In 2009, 11 of the 14 foreign public offerings made on United States exchanges were of mainland Chinese companies, according to Renaissance Capital, which also monitors I.P.O.’s.
As the recession ebbs, investors are betting that the market for I.P.O.’s in the United States, Europe and Latin America will rebound this year. But no country is likely to produce more lucrative listings than China, where hundreds of companies are expected to raise tens of billions of dollars going public this year.
Just two companies — the Asian arm of American International Group and the Agricultural Bank of China — that could go public this year are expected to raise a total of $30 billion to $40 billion, about what American companies raise in a decent year.
“A fund manager with a global portfolio is being reckless if he doesn’t have exposure to China,” says Mark Machin, co-head of Asian investment banking at Goldman Sachs. “It’s going to be the world’s second-largest economy.”
The Carlyle Group, one of the world’s biggest private equity funds, said this month that it would join the Beijing municipal government to create an investment fund denominated in renminbi. The Blackstone Group recently set up a venture with the Shanghai government.
Mr. Ross said he recently invested $100 million in a state-owned Chinese company called Longyuan Electric Power Group before its $2.6 billion listing in Shanghai last year. “Chinese companies deserve a premium, a multiple over Western companies,” he said.
Investors are motivated by stories about how companies like Naspers, a media and entertainment group in South Africa, invested $30 million in Tencent, a Chinese Internet company, for a 36 percent stake in 2001. Today, that stake is worth more than $13 billion. At the same time, performance can be sketchy. The top three initial public offerings listed in the United States last year were Chinese companies, including Changyou.com — but three of the five worst performers were also Chinese companies with riskier profiles, according to Renaissance Capital.
New stock listings have pumped billions of dollars into China, capitalized scores of companies and helped create a class of billionaires. According to Forbes, China had 79 billionaires in 2009, up from just one in 2003. Most of that money is tied to shares of newly listed companies.
That is one reason Chinese investors — largely restricted by law to buying on the Shanghai and Shenzhen exchanges — are also keen on I.P.O. shares, which almost always have a big first-day price increase.
In 2009, for example, shares of newly listed companies on those two exchanges jumped, on average, 74 percent on the first day of trading in China. That was the smallest share price increase in three years. In 2007, the average jump was 193 percent. To accommodate the soaring number of smaller Chinese companies interested in going public, China last fall opened a Nasdaq-like stock exchange called ChiNext.
It has been a huge hit. On its opening day last October, shares of all 28 companies were in such demand that the exchange temporarily suspended trading so investors could catch their breath.
With domestic I.P.O. listings drying up, American exchanges have been strengthening their ties with China. In 2007, the New York Stock Exchange opened an office in China and has even been loosening its listing standards to lure more Chinese listings to Wall Street.
That has elicited concern from some analysts who say it could allow lower-quality companies to go public. Critics have long warned about unknowns that already come with investing in Chinese companies: insider trading scandals, the lack of transparency, poor regulatory oversight, volatile prices and a lack of clarity on shareholder rights.
“Are you really getting disclosure?” asked Carl E. Walter, a Beijing-based investment banker and co-author of “Privatizing China: Inside China’s Stock Markets.” “Do you really know who the investors are in these companies when they all act through nominees?” he said, referring to surrogates. Chinese regulators are trying to take steps to deal with market weaknesses here. Late last month, for instance, regulators criticized financial institutions for “irresponsible” pricing of I.P.O.’s, saying it had helped fuel stock speculation, even though recent offerings had slumped in early trading.
In the United States, officials at the New York Stock Exchange and Nasdaq, which also has been aggressive in recruiting Chinese companies, insist investors have strong protections.
“The N.Y.S.E. lowered the financial requirement — actually we prefer to say making it more flexible,” said Michael Yang, the chief representative in China for the New York Stock Exchange Euronext. “But we never lower down other requirements, including corporate governance, transparency, disclosure, financial report, etc.”
Mr. Yang said the changes would allow smaller, fast-growing companies to join the exchange.
Listings on the two exchanges raised $27 billion last year, down from about $31 billion in 2008 and a record $65 billion in 2007. The New York Stock Exchange Euronext’s acquisition of the American Stock Exchange in 2008 has also helped attract smaller Chinese companies eager to tap America’s investing public.
Mr. McCooey at Nasdaq said public offerings had helped companies realize their value and their dreams. He points to companies like Sohu.com, which listed on Nasdaq in 2000. The company’s shares plummeted to about $35 million in 2002. But in 2008, a lengthy effort to develop the Changyou.com gaming unit began to pay off, creating a casual game so popular that Sohu executives decided to spin it off into a separate listed company.
“I’m relieved,” said Charles Zhang, the chairman of Sohu, who just ordered a private jet. Sohu still retains a 70 percent stake in Changyou, which is now valued about $1.7 billion. “I don’t have to worry about our gaming strategy,” he said.