Why There May Be an Insatiable Appetite for Chinese IPOs

 

The Chinese are coming! Well, not really, but we did see the first Chinese initial public offering (IPO) of the year list on an U.S. exchange yesterday and only the third Chinese IPO since 2011. The pipeline has dried up from the 60 or so Chinese IPOs listing in the U.S. from 2008 to 2011. And whether the flow will start again is questionable, as I doubt it will happen.

China-based shopping center LightInTheBox Holding Co., Ltd. LITB, an online seller of apparel and other household goods to the world market, is the top Chinese online retailer as far as sales to customers outside of its country’s borders. The company, sometimes seen as the little “Amazon.com” of China, was started by Alan Guo, who was previously an executive at Google China. The company priced 8.3 million shares at $9.50 (the mid-point). The deal was hot due to the absence of IPOs coming from China. The stock surged 34% to an intraday high of $12.69 prior to settling at $11.61 for a market cap of about $470 million.

The strong buying in LightInTheBox indicates the demand for Chinese IPOs that are deemed to be trustworthy. The other two Chinese IPOs that debuted in 2012 have done well—online discount retailer Vipshop Holdings Limited VIPS and social media company YY Inc. YY are up a whopping 340% and 150%, respectively, from their IPO debuts.

At issue have been the numerous cases of fraudulent financial reporting by Chinese companies listing in the U.S., since these companies were not subject to U.S. reporting requirements with many listing on the bulletin board and pink sheets.

The Securities Exchange Commission (SEC) finally had enough and decided to demand more detailed and audited reporting by Chinese companies seeking to list in the U.S.

We all know what happened after; whether the flow of Chinese IPOs will begin again for the U.S. capital markets is doubtful at this time, as there’s tons of money available in Asia. (Read “Chinese Economy Finally Slowing; What It Means for Its Stocks.”)

Goldman Sachs suggests the major market for Chinese IPOs will be at home in China, where there could be as many as 349 IPOs this year. (Source: “China: A-share Portfolio Strategy, IPO deep dive: The Sword of Damocles or Paper Tiger?,” China First Capital web site, January 23, 2013, last accessed June 10, 2013.)

Of course, the U.S. capital markets are favored by Chinese companies that want more exposure and possible access to the U.S. and other global markets for their products.

Yet based on what the SEC has said, any Chinese company looking at listing here will be subjected to stringent reporting requirements, including all of the approved U.S. “Big Four” auditors. I’m all for the move, as it will give me more confidence in buying Chinese stocks.

Based on what happened to LightInTheBox, the demand for Chinese IPOs appears to be hot. The problem will be to convince the Chinese to adhere to U.S. demands.

With over 1.3 billion people and a massive middle class, you know there are many Chinese companies that would find a nice home here.