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Two Chinese IPOs to test US market

(Agencies)
Updated: 2009-06-22 10:08

NEW YORK/HONG KONG: Chinese-based companies seem poised to return to the US capital markets after a nearly one-year absence, potentially signaling a renewed appetite among investors for riskier stocks.

Two companies, Beijing-based water treatment supply distributor Duoyuan Global Water Inc and Shanghai chemicals company Chemspec International Inc, are set to price initial public offerings this week on the New York Stock Exchange, and become the first stand-alone Chinese companies to list on a US exchange since August.

The IPO market in the United States has begun to rebound in recent months with a handful of successful deals, and the arrival of the two Chinese deals could mean investors are ready to take another look at foreign companies, in particular those from China.

"It's too early to pop champagne corks," said Ronnie Kent, head of international listings at NYSE's parent company NYSE Euronext Inc. "The fact they are being done by foreign companies is encouraging because when investors go through this much of a hurricane, they retreat to their home base."

Related readings:  Chinese shares decline 1.91% on worry about IPO restart  IPO norms favor small investors  Jittery market braces for IPO flood  IPOs need bold reforms  IPOs back after long suspension

After a record year in 2007 when China-based companies raised $6.8 billion through 29 US IPOs, deals fell off a cliff in 2008, according to ThomsonReuters. Only two deals generated $96.6 million as investors, traumatized by the economic crisis, avoided IPOs with even a whiff of extra risk.

To be sure, 2009's most successful IPO in the United States so far was by a Chinese company: online video games maker Changyou.com Ltd, which has soared 140 percent since its April debut on the Nasdaq. But that was a carve-out of a well-known, profitable company, Chinese Internet portal Sohu.com.

Investors may need some coaxing, however, to warm up to Chinese companies again.

Aside from Changyou.com, the four most recent Chinese IPOs on Friday were trading off their offer price, For example, technology consulting firm ATA Inc was down 21 percent since its January 2008 IPO.

But with China's economy being one of the few in the world to grow this year, US investors will want a piece of the action, Kent said. The World Bank this week raised its 2009 GDP growth forecast for China to 7.2 percent from 6.5 percent.

Home Away from Home

For nearly a year, Chinese companies mulling IPOs have had no choice but to look abroad. But this week, the China Securities Regulatory Commission ended a nine-month moratorium on IPOs. China's main stock market rallied 26 percent over that time.

China on Friday gave Guilin Sanjin Pharmaceutical Co approval to raise about 634 million yuan ($93 million) in China's first IPO since last September, with about another 30 deals in the queue, according to analyst estimates.

Even if their domestic stock market does reopen, Chinese companies may still opt for US listings to fetch better prices, bankers said.

"Most of the time, the reason behind a Chinese company listing in the US has to do with the comparable companies in Asia," said a senior equity capital markets banker at an investment bank in Hong Kong, who asked not to be identified because he is not authorized to speak on the record.

"If the Chinese company can find a comparable company in the US that's a higher multiple, then there's a more interesting story for the company going public and its underwriters."

What's more, this banker said, as Chinese technology companies seek IPOs, they will prefer US exchanges, which have a deeper pool of comparable stocks.

Though US investors are showing renewed interest in Chinese IPO stocks, they remain exacting about a company's growth prospects in a bumpy economy and stock markets.

"I don't see a flood of Chinese IPOs on the horizon," said David Menlow, president of research firm IPOfinancial.com. "The deals have to be pristine. It's still IPO 101 basics until further notice."