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Chinese IPO Frenzy Raises Talk of a Bubble

Last week, shares of Youku, called the YouTube of China, rose 161 percent in the first day of trading on the New York Stock Exchange.

E-commerce China Dangdang, an online retailer heralded as the Chinese Amazon.com, popped 87 percent after its initial public offering the same day.

The Internet content provider China Cache International Holdings rose 95 percent in the day after its Nasdaq debut in October.

But investors’ giddiness over the tech upstarts — and the dozens of other Chinese companies that have gone public in the United States in recent months — has somewonderingwhether this boom has the makings of a bubble.

NYSE Traders
Oliver Quilla for CNBC.com
NYSE Traders

“If these I.P.O.’s continue to work, they’ll play them until the merry-go-round stops,” said Scott Sweet, senior managing partner of the research firm IPO Boutique. “And when it stops, it will stop with little notice — and it will be nasty.”

Amid a sluggish I.P.O. market, companies from China are finding a home in the United States. Last week, six Chinese stocks started trading on the New York Stock Exchange and Nasdaq, the most ever in a single week. The 35 Chinese offerings so far this year have accounted for 23 percent of I.P.O.’s in the United States, up from 1 percent in 2000, according to Thomson Reuters.

More are expected in the coming months. Youku’s biggest rival, Tudou, filed plans last month to go public in the United States.

For Chinese companies, listing on American exchanges comes with stricter accounting and disclosure standards — which can be costly for smaller companies just starting out. But the rewards are significant, potentially including access to more capital, a wider investor base and the cachet of a New York Stock Exchange or Nasdaq ticker symbol.

“It’s the patina associated with the highest-standard marketplace in the world,” said Scott Cutler, executive vice president and head of listings for NYSE Euronext. “That means something when you’re doing business internationally.”

With a listing in the United States, Mr. Cutler said, a Chinese company is also likely to draw a comparison to a domestic stalwart — as in the case of Youku and YouTube. That can help spur significant shareholder interest out of the gate.

After his company’s I.P.O., Youku’s founder and chief executive, Victor Koo, called it a “great day.”

“This step will position Youku for future development and growth to be the primary video content provider for Chinese Internet users across all Internet-enabled devices,” Mr. Koo said in a statement.

The trick for investors— as in the late 1990s dot-com bubble — is separating the future Amazons from the Pets.coms.

While I.P.O.’s can make investment bankers and founders rich, regular investors who do not get the initial price rarely make the same returns.

Baidu.com, hyped as the Chinese Google, rose 354 percent the day of its public offering in August 2005. But the stock quickly slumped, falling more than 60 percent over the next six months. Shares didn’t fully regain their ground until the end of 2006.

At quick blush, the latest batch of Chinese offerings appears to best the broader group in the United States. On average, they have returned 30.5 percent this year, compared with a 22.5 percent gain for all new stocks, according to data from Renaissance Capital, an investment firm in Greenwich, Conn.

But excluding the first day of trading, the numbers tell a different story. Chinese companies with American offerings this year are up 10.9 percent, excluding the one-day pop, compared with 11.4 percent for all new listings.

Investor interest in Youku has already cooled significantly. Shares continued to rise the day after its first-day surge. But after that, the stock started to slide. It closed Monday at $30.40 — 138 percent above its initial offering price of $12.80, but down 39 percent from its $50 high.

Four other new listings last week, including the movie distributor Bona Film Group and the mobile application provider Sky-mobi, made their debut to tepid interest from investors.

“Drinking the Kool-Aid — it’s absolutely that,” said David Menlow, president of the research firm IPO Financial. “When somebody on TV throws out the phrase, ‘This is the Chinese equivalent of Amazon,’ who’s going to dispute its strength in an economy that just doesn’t seem to want to stop?”

In Mr. Menlow’s view, Chinese companies like Youku should be categorized as high risk, high reward. The allure is obvious, given the country’s soaring economy and growing middle class.

“Investors are clamoring for growth investment opportunities,” Mr. Cutler said of the New York Stock Exchange. “It so happens that the Chinese are delivering on all fronts.”

But the dangers, some argue, deserve as much attention, if not more. For one thing, American investors tend to know comparatively little about new Chinese companies. Worrisome, too, is China’s poor reputation when it comes to corporate governance.

“That is what looms in the shadows,” Mr. Menlow said. “When one of these deals unravels because of accounting problems, restatements or anything that is going to eviscerate the foundation of the financials in a company, then we may end up having somewhat of a mini tsunami effect with the rest of the Chinese deals that are out there. It will be like dominoes that will fall.”