Talking Point

Dotcom fever rides again

Tech firms surge in US stock debuts, but will Alibaba soon follow?

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Jack Ma: New York’s battle to win Alibaba’s listing may not be over yet

A tech firm knows it has become part of the social fabric when it inspires a hit TV show. Case in point: Craigslist. Elizabeth Meriwether says she based her hit US comedy New Girl on her own experiences of browsing the classified ads on the website, recounting to Collider.com that it was a time in her life when she was “bouncing from Craigslist sublet to Craigslist sublet”.

Sure enough, the listings website plays a prominent role in the opening episode of New Girl, with the show’s star Zooey Deschanel using it to find a flatshare. The series aired its 56th episode this week, perhaps because Deschanel’s character Jess is exactly the sort of roommate that thirty year-old singletons would like to find. The show’s mention of Craigslist – which started in San Francisco in 1995 and now gets 20 billion page views per month – is evidence of how pervasive the site’s reach has become in the US. And while it remains privately-owned, a widespread recognition of the Craigslist brand probably helped its Chinese equivalent go public in New York last week.

Are we seeing a revival in Chinese tech IPOs in the US?

On the evidence of the past week or so, the answer would seem to be a qualified yes. The initial public offering of 58.com, widely dubbed as the ‘Craigslist of China’ was a resounding success, increasing in price by more than 45% on its first day of trading. The company raised $187 million, pricing its offering at $17, well above the expected range of $13 to $15.

Like Craigslist, 58.com is a classified advertising platform, with a footprint that spans 380 Chinese cities. According to the prospectus, 130 million users access the site each month, with an average 1.9 million listings posted every day ( as per the second quarter). Website TechCrunch says the ads are broadly similar to those in the US, but that 58.com has been especially successful in hosting short term job classifieds for blue-collar workers. And while 4.3 million merchants also advertise on the site, probably what excites investors most is 58.com’s success in making the leap onto smartphones screens. About 39% of its page views come from mobile applications.

But it wasn’t just 58.com that proved a hit with US fund managers last week. Following closely on its success was a second IPO, this time for Qunar, a travel website controlled by search engine giant Baidu (for our first mention of Qunar, see WiC126). It raised $167 million and surged an eye-popping 89% on its first day of trading last Friday, according to Bloomberg. It too priced its offering above the initial target of $11.50, persuading investors to part with $15 for each American depositary receipt.

Qunar shares have since trended downwards but have kept hold of most of their early gains, closing at $26.50 earlier this week.

According to the New York Times that sort of enthusiasm “suggests investors may be warming once more to Chinese companies that seek initial public offerings in the United States”.

But last week’s heady mood needs some context too. LightInTheBox, the only other Chinese tech firm to list in New York this year, more than doubled in price after debuting in June. Its own depositary receipts are now trading about 10% below their IPO price.

The bigger picture tells a story too. The first wave of Chinese tech IPOs started out with Sina.com – owner of the enormously popular Twitter-equivalent, Weibo – in 2000. Over the next decade at least 200 other firms followed Sina to Nasdaq or the New York Stock Exchange (many from the tech sector), raising money through IPOs or reverse takeovers.

So far this year five Chinese firms have completed IPOs on American bourses, a small increase on last year when just two sought a listing. Then again, the figure is much lower than 2010, when Reuters reported that 40 Chinese firms had sought American IPOs.

Why the reduction in China IPOs on the US markets?

The past two years have not been kind to US-listed Chinese stocks. As longtime readers of WiC will recall, the entire group has been dragged down over suspicions about fraudulent accounting. This began in mid-2011 when short-sellers like Muddy Waters began publishing research on dubious practices it alleged to have uncovered (see issue 111). The high-profile exposure of Sino-Forest – “effectively a Ponzi scheme”, Muddy Waters alleged – eroded confidence in the financial statements of a number of other Chinese firms. There was widespread dumping of shares in ‘China-concept’ stocks and the sell-off was compounded when the US Securities and Exchange Commission expressed its own reservations about Chinese financial reporting.

McKinsey has estimated that investors in US-listed China stocks lost 72% of their investment over a two-year period.

Of course, solid Chinese companies were tarred with the malpractices of their less scrupulous brethren. With stock prices sagging, some of the majority shareholders no longer saw the benefit of a US listing. Delistings of Chinese firms from American bourses outnumbered new public offerings.

So has the mood changed? That is the debate triggered among investment bankers after the successes among last week’s IPOs. But as the New York Times cautions: “The question now – for both American investors and the companies from China waiting in the wings to raise money from them – is whether these recent deals are an anomaly or have truly managed to unfreeze a market that was once a top destination for Chinese companies seeking to list overseas.”

An interesting week to IPO…

It may be a coincidence but it was nevertheless a notable one: last week not only saw the two Chinese IPOs in America, it was also the first anniversary of the ban on new listings on China’s own domestic bourses. The freeze, said to have been prompted by a desire to eliminate IPO candidates with dodgier financial statements, has blocked an estimated 900 companies from making their market debuts since last November. According to the Financial Times, 270 have since withdrawn their applications after regulators demanded fresh financial background checks. Most of the others are stuck in the holding pattern – though about 10% of the waiting firms have now been cleared by the CSRC listing committeee pending final approvals to raise a combined Rmb55.8 billion ($9.1 billion), according to earlier estimates from Ernst & Young.

The Financial Times is reporting that the IPO freeze could last another six months but the truth is that no one really knows when the block is going to be lifted. When the restrictions were adopted, many bankers were hopeful they would be gone by Chinese New Year. Nine months later and the embargo is still in place.

So with no domestic opportunity to raise equity capital, it’s no surprise that faster-growing firms have been eyeing overseas markets. For tech outfits that’s led to a gravitation back to the US, which offers an investor base most familiar with their industry.

Still wary?

The short-sellers haven’t gone away, mind you, and they still have Chinese companies firmly in their sights. That became clear once more in October when Muddy Waters published a new 81-page report on NQ Mobile, describing the maker of mobile phone security software as a “massive fraud”.

In response NQ defended itself in a conference call, issuing a series of presentations, press releases and interviews.

Bloomberg conducted its own mini-investigation. Its conclusion: “Accountants, a professor and a lawyer interviewed by Bloomberg News said the report’s criticism of NQ’s cash accounting and the way the Chinese company got funds from its US public offering may be unfounded. On the other points Muddy Waters raised in its report, it’s still hard to gauge their validity.”

NQ has been experiencing delays in collecting payments from customers. These are considerably longer than those of competitors like Qihoo 360 and Tencent, something that Muddy Waters sees as a red flag for fraudulent behaviour. But Bloomberg interviewed a partner with New York-based accounting firm Marcum Bernstein & Pinchuk who said that isn’t a given. It identified another Chinese firm – AsiaInfo-Linkage, a telecom software developer – whose collections were even slower. Its main customers are the biggest phone carriers in China, and the accounting firm says that a valid explanation for NQ’s figures is that it deals with large clients that pay slower.

As Bloomberg surmises: “The mixed scorecard helps explain why the stock declined more than 60% nearly three days after the report, then pared the loss to 44% by the November 1 close in New York.”

Another short-selling debacle back in the news is Silvercorp. The Henan-based but New York-listed firm has recently appeared in court suing short-seller EOS Holdings for a report that it says wiped $230 million off its market value.

Silvercorp is a miner, not a tech company. But it is also a telling case, given the ferocity of the charges and counter-claims unleashed since EOS published its original analysis in late 2011 alleging that Silvercorp had inflated its profits and misled investors about its production levels.

To get its information, an EOS mole installed cameras near the mine, counting trucks and estimating production levels. In a detailed analysis of the dispute, Caijing Magazine reports that Silvercorp’s owner Feng Rui was furious at this tactic, reporting the EOS employee to local police for trespassing. He was subsequently arrested and taken to court in Henan on charges of photographing the mine illegally with intent to damage Silvercorp’s business reputation. (The case is ongoing.)

EOS’s accusations did spark a new corporate governance offensive at Silvercorp. Feng hired KPMG to conduct a forensic audit and the results led to a 40% recovery in stock price to $10. On the other hand, the international geologists that Feng hired to prove up Silvercorp’s reserves found that there was only about half the silver claimed in the company’s 2011 annual report (when the stock price was closer to its $16 peak).

Amid the confusion over the conflicting data being issued by both sides, one of the more interesting disputes was their argument over the truckloads counted by EOS. Feng has tried to refute the claims by insisting that the short-seller has undercounted his production. Why? Because all of the trucks were overloaded, Caijing cites Feng as saying. It’s a curious defence. Clearly Feng would prefer to incur the wrath of the highways agency than the securities regulator…

Back to the sentiment on tech listings…

Last week excitement over 58.com and Qunar has whetted appetites for a more gargantuan Chinese tech listing. The candidate in question, of course, is Jack Ma’s Alibaba Group, which has been talking to different bourses in hope of arranging beneficial terms for its market debut.

Following the barnstorming IPO of Twitter this week, Alibaba promises an equally exciting offering, likely to value the company at close to $100 billion and raise $15 billion

As we reported in issue 211, it looked last month as if the stricter Hong Kong regulations had persuaded management of the merits of New York. But like Hamlet – who teases audiences with his will-he-won’t-he indecision – Alibaba’s bosses have remained coy.

The certainty of a US listing has receded in recent days. Indeed, in a case of the tech giant ‘doth protest too much’, its CEO Jonathan Lu gave a recent interview to the South China Morning Post in which he hinted that Hong Kong remains its preference.

Alibaba founder Ma has also commented on the topic. “Our original plan was to launch the IPO this year, but since our boat hit the rocks in [Hong Kong’s] Victoria Harbour, we have to postpone it,” he said, indicating that the listing won’t happen this year.

Ma told media he has not set a new timetable, but was heartened by a recent blog posting by Hong Kong stock exchange boss Charles Li calling for a “proper debate” on “non-standard shareholding structures” for “innovative companies”.

The issue is the dual-class share structure that Ma wants. This would allow the founder and his partnership to nominate the majority of the board (and by definition name the CEO and retain management control; a structure Ma says is essential as “it is impossible to even think of the company being led by an outsider”). Such arrangements are currently not permitted in Hong Kong for corporate governance reasons.

Ma is not giving up: “Hong Kong has no need to change anything for Alibaba, but Alibaba is very glad to see that the city is reflecting after the company proposed its IPO plan. Hong Kong should have this debate and Alibaba will be very happy to participate in the discussion and we will participate with a positive and optimistic attitude.”

The dual class structure is permitted in New York but Ma’s reluctance to push ahead suggests he sees disadvantages with the US route. Want China Times agrees, saying Ma will “think twice before listing in the US because it might face lawsuits related to its Alipay business” (which was spun off in controversial circumstances, see WiC118).

The current message seems to be that Alibaba’s IPO is on hold. Frustratingly for New York bourse executives the city looks like it’s second choice. That could stall the trend – flagged by 58.com and Qunar’s IPOs last week – of a resurgence in Chinese listings in the US.


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