U.S. Investors Avoiding Chinese IPOs

Includes: DGWIY, LFT
by: Renaissance Capital IPO Research

Another wave of Chinese IPOs are hitting the U.S. equity market, but this time many U.S. investors are staying dry. The reasons for this growing aversion are several, but paramount among them is evidence of actual fraud at a handful of companies, skepticism about business models and growth rates, inadequate financial controls and opaque financial disclosures. As a result, Chinese IPOs have been one of the worst performing groups in the U.S. IPO market, which furthers investor avoidance of the sector. If an investor bought every Chinese IPO since 2008, the average return though mid June would have been a -24% loss, compared to a 25% gain on the average non-Chinese IPO.

The ongoing fraud investigations of Longtop Financial (NYSE:LFT), Duoyuan Global Water (DGW) and other Chinese issuers coupled with the Securities and Exchange Commission's suspensions of trading in some Chinese "reverse merger" U.S. shell companies have caused investors to be suspicious of all Chinese IPOs.

Despite these problems, issuance activity of Chinese companies in the U.S. has continued unabated since 2009.