GOING PUBLIC: Frothy Investors Weigh On Asian IPOs In US
Last Update: 5/16/2011 12:51:44 PM
By Lynn Cowan
Of DOW JONES NEWSWIRES
A combination of hype and hyper investors have caused a lot of misery for Chinese
companies debuting in the U.S. this month
Five China-based stocks have launched initial public offerings on the Nasdaq or
New York Stock Exchange so far in May, and all but one has lost ground since its
first day of trading. By comparison, only one of the six non-China deals that
debuted during that time is trading down.
Analysts and bankers say a rush of momentum investors seeking the next hot deal
have been piling into Chinese stocks that are listing in the U.S., driving demand
for shares higher ahead of their debuts, which then price within or above
expectations. Whether the stocks start off with some gains or a decline, these
eager buyers become quick sellers, and the resulting downturn has sparked a
cascade of investors seeking exits. An additional damper has been increased
broader market volatility in recent weeks.
"More investors are looking at these IPOs with expectations of participating in a
hot deal. If the stocks turn down early on with those kinds of buyers, it gets
exacerbated and becomes a significant selloff," says Nick Einhorn, research
analyst at Greenwich, Conn.-based research firm Renaissance Capital.
Late last year, some Chinese stocks delivered very high first-day gains;
Youku.com Inc. (YOKU) jumped 161% on its first day in December, ChinaCache
International Holdings Ltd. (CCIH) rose 95% during its debut in October, and
E-Commerce China Dangdang Inc. (DANG) gained 87% in December. After a slow start
earlier this year, a second wave seemed possible after Qihoo 360 Technology Co.
Ltd. (QIHU) jumped 134.5% in March.
But Qihoo 360 appears to have been an anomaly. Indications of investor demand
were running high for shares of social networking site Renren Inc. (RENN) earlier
this month, with investors vying for shares and some analysts expecting first-day
percentage pops in the high double-digit percentages. The company's price range
was raised and it then priced at the high end of that range, but rose 29%, a
smaller gain than expected. Shares proceeded to tumble the very next day, and the
company was recently changing hands at $12.90, below its $14-a-share IPO price.
While there's always an element of short-term trading among IPO buyers looking to
make quick trading gains, investment banks generally try to place shares with
some longer-term holders and aim to leave some demand unfulfilled among initial
investors. In the ideal situation, there is a strong base of buyers who
understand the company fundamentally and who believe over time it will build
value.
"There's certainly a lot of game theory and psychology around any transaction,
and the lines of market momentum will intersect with those of the company's
fundamentals," says Dan Cummings, global head of equity capital markets at Bank
of America-Merrill Lynch. "To the extent that people like something solely
because it's oversubscribed doesn't portend well for understanding the company's
intrinsic value. They may know the price but will not have conviction in the
aftermarket if there's a sign of weakness in price."
Cummings places some of the blame for such froth on the media, saying journalists
fuel the hype surrounding some deals.
"The media focus on IPOs has been binary. There is a media obsession now with
brand names, but there are plenty of great companies, game changers with
disruptive technologies, coming to market that get far less attention," he says.
Whatever the cause, this month there's been a disconnect between the pricings and
the residual demand that is expected on the first day, with some Chinese deals
rumored to be heavily oversubscribed, only to sink like stones later, as Renren
did; or during their debuts, as was the case for NetQin Mobile Inc. (NQ), which
lost 19% on its first day after pricing at the high end of its range. NetQin was
recently changing hands at $7.78, well below its $11.50 IPO price.
Over the past eight months, 36 Chinese companies have tapped the U.S. capital
markets for the first time, with an average first-day pop of 21%, according to
data tracker Ipreo. However, 30 days after their debuts, these deals traded an
average of only 4% above their offer prices. In comparison, U.S.-based companies
brought 147 initial offerings to market in the same period with an average
one-day rise of 8% and an average 30-Day return of 22%, says Ipreo.
"If investors extend their recent wariness towards deals from China, this trend
may continue. Amid a strong flow of 15 initial filings last week, only one, rice
production company Grand Farm Inc., hailed from China," Ipreo predicted in a
research note.
-By Lynn Cowan, Dow Jones Newswires; 301-270-0323; lynn.cowan@dowjones.com |
