The booming market for Chinese IPOs in New York got some worrisome signals last week after investors shunned 2 new listing candidates, raising the very real possibility that the current wave of enthusiasm is quickly ebbing. That could mean a new period of stagnation or even a downturn is looming for the sector, which suffered for 2 years before rebounding sharply in the second half of 2013.
While free markets should always dictate the flow of new listings, some firms in the crowded field of new IPO candidates might consider a self-selection process to weed out some weaker names from their ranks. That could see younger, money-losing companies postpone their offerings, in an effort to avoid a new wave of investor fatigue, that would ultimately hurt the entire sector.
The second half of 2013 saw a remarkable turnaround for Chinese companies listed on the New York Stock Exchange and Nasdaq, as many emerged from a 2-year slump sparked by a series of scandals that exposed accounting weaknesses among the larger group. Shares of leading search engine Baidu (Nasdaq: BIDU) rose 90 percent between July and the end of last year, while leading web portal Sina (Nasdaq: SINA) and fast-rising e-commerce firms Vipshop (NYSE: VIPS) rose 50 percent and nearly 200 percent, respectively, over the same period.
Seizing on the momentum, a group of Chinese Internet firms launched IPOs in the last 2 months of the year to strong receptions. Names like car information provider Autohome (NYSE: ATHM) and online classified advertising site 58.com (NYSE: WUBA) both more than doubled in their first 2 months of trading, and even money-losing online travel agent Qunar (Nasdaq: QUNR) nearly doubled over a similar period.
Sensing the new investor enthusiasm, a flood of Chinese companies have filed for new U.S. listings in the last 2 months, aiming to collectively raise billions of dollars in new funds. Leading the charge is JD.com, China's second largest e-commerce firm, which aims to raise up to $1.5 billion, followed by Sina's popular Weibo microblogging service, which initially targeted up to $500 million.
Even lesser known names have filed for relatively large offerings that would have been unthinkable just a half year ago. Cheetah Mobile, the security software arm of Kingsoft (OTCPK:KSFTF), is typical of this bullish group, filing last week for a New York IPO to raise up to $300 million. (previous post)
But just a day after news of Cheetah's plan emerged, the market took a sobering turn with the lackluster trading debut for Tarena (NASDAQ:TEDU), an education services company that became the first Chinese company to list in New York this year (previous post). Tarena priced its stock in the middle of its range, a sharp contrast to previous offerings that priced at the top of their range, and then saw its shares end their first trading day nearly unchanged from their IPO price. The shares remained unchanged in their second trading day on greatly reduced volume, as investors largely shunned the new stock.
An even more worrisome sign came at the very end of the week, when Sina announced its first stock pricing terms for the highly anticipated IPO of Weibo, often called the Twitter of China (English article). Sina announced it was aiming to raise up to $380 million through its Weibo offering, in a listing that would value the company at up to $1.7 billion.
The fund-raising amount could rise a bit more to $440 million if strong demand triggers an overallotment option. But even if that happens, the final amount will still be far short of the $500 million target that Sina originally envisioned, hinting at disappointing demand for the stock. What's more, the $1.7 billion market value is about half the estimated $3.3 billion that Weibo was worth just a year ago when e-commerce leader Alibaba bought 18 percent of the microblogging service.
The weak showings for both Tarena and Sina Weibo hint that U.S. investors are starting to lose interest in Chinese companies, which will not only undermine upcoming IPOs but could also rekindle a new downturn for existing listed firms whose shares are already showing signs of weakness.
In a bid to avoid that outcome and support the broader sector, some of the smaller and younger companies coming to market might reconsider withdrawing their listing plans for the benefit of everyone. Even if they decide to move ahead, many may ultimately have no choice but to withdraw their applications if the market wavers and investor sentiment sours towards these companies that are probably not ripe for listings anyway.
Bottom line: Weak showings for Tarena's stock debut and Sina's planned offering hint the bull market for Chinese stocks in New York may be losing steam.
Disclosure: No positions.