Is a wave of Chinese IPOs on the horizon?

Zhang Yuwei| New York Journal

Despite the small number of Chinese companies that have listed on US stock markets this year, the stable performance of many of them is a good sign that a wave - however small - of Chinese firms is on its way to listing in the US.

Several Chinese companies' initial public offerings (IPOs) in the US are reportedly in the works. 58.com, a Chinese local classified-ad website modeled after Craigslist.org, plans to seek at least $100 million in an IPO, working with Credit Suisse Group AG and Morgan Stanley, according to Bloomberg News.

58.com picked up the trend of a group of Chinese Internet and media firms coming to US stock exchanges, most of which have showed stable, sold performance in the markets.

Guangzhou-based YY Inc, a social-networking site, raised $94.2 million last November and has more than tripled in trading. In June, Beijing-based online retailer LightIntheBox Holding Co, the first Chinese company listed in the US this year - raised $90.7 million and has shown strong performance since, gaining more than 75 percent earlier this month.

"From a macro-perspective, there is strong interest for IPOs in the US, in general, due to the buoyed stock markets and increasing risk appetite," said Josef Schuster, founder of Chicago-based IPOX Schuster LLC, a research firm specializing in financial products related to global IPOs.

"IPOs with a US domicile have naturally benefited, but also foreign IPOs, like Chinese firms, in particular IPOs in specialty industries such as internet, consumer related deals," he added.

Most recently, 500wan.com - a Chinese venture capital-backed local lottery website - reportedly plans on raising at least $150 million through an IPO in the US later this year.

Qunar, a Baidu-backed Chinese online travel company, has been reported by local media to be planning to raise some $1 billion to list in the US sometime this year.

"It's an opportunistic move by the company to capitalize on the increasing demand for China-linked IPOs in the US," said Schuster.

Shenzhen-based 500wan.com was founded in 2001 and has attracted 1,500 registered online users, receiving most of its revenue from sports lottery sales.

Launched in 1987, China's lottery industry is relatively young. In April, China's lottery ticket sales rose 21.1 percent year-on-year to $4.6 billion. In just the first six months of this year, its revenue jumped by 16 percent.

Chinese IPOs in the US cooled off following a series of accounting scandals in 2011 when small Chinese companies went public through a reverse takeover. Most of them were not audited by any of the Big Four accounting firms - KPMG, Ernst & Young, PricewaterhouseCoopers, or Deloitte.

In 2011, there were 12 Chinese IPOs, down from 41 listings in 2010, according to research firm Renaissance Capital. Last year only two listed - discount clothing website Vipshop and social media networking site YY.

China Commercial Credit Inc, a microloan company that lends to small firms and farmers in China's Jiangsu province listed its shares on the Nasdaq, becoming the second Chinese company listed in the US following LightinTheBox.

"The respective IPOs are obviously highly risky deals. Good performance eventually has to come in line with strong earnings, to justify valuations," said Schuster.

Because of the market sentiment toward the Chinese IPOs after the accounting scandal, both investors and Chinese firms are cautious more than ever about the environment. In late June, Hong Kong-based GDC Technology - a digital-cinema equipment maker backed by the Carlyle Group -postponed its IPO on Nasdaq citing "poor market conditions".

"The US equity market is built on trust, and many Chinese issuers have destroyed trust among US investors," said Timothy J. Keating, CEO of Keating Capital, a business development company that specializes in making pre-IPO investments. "It will take a long time for this damage to be repaired, and rightfully so," he added.

Schuster, however, predicted a pickup of Chinese IPOs in the US in the coming months.

"They should benefit from improved general US IPO markets and some solid performance of recent China-linked deal flow, on average," said Schuster.

Hangzhou-based e-commerce company Alibaba is reportedly to launch its IPO worth more than $15 billion by the end of the year. Hong Kong has been tipped as the likely place for the mega IPO but it's recently reported that Hong Kong Exchanges and Clearing Ltd doesn't allow dual class listings - something the company seeks and helps its founders and management with over its individual investors.

Reuters reported that the Chinese Internet firm now is comparing Hong Kong and the US where both the Nasdaq and New York Stock Exchange allow dual class listings.

"The fact Hong Kong is pretty quiet and the [Chinese] mainland IPO market closed should help China-linked deals flow into the US as well. Eventually, an Alibaba dual-listing in the US would really help to act as a catalyst for more Chinese IPOs in the US," said Schuster.