Chinese IPOs In U.S. To Start 2014 Fast, Then Sputter

by: Doug Young

U.S.-listed Chinese stocks neared the end of 2013 with a wild ride last week, as 3 major developments provided a glimpse of the bumpy road that lies ahead in the New Year. That performance points to a strong start for new IPOs at the start of 2014, even though momentum could quickly flag due to the highly volatile and unpredictable nature of these stocks.

Chinese firms began last week on a high note, with 2 major developments on the funding raising front in New York. One of those saw online car services website Autohome (NYSE: ATHM) roar out of the gate for its Wall Street IPO, becoming the fifth such offering by a Chinese Internet firm in the last 2 months. The year-end flurry of new offerings marked a sudden turnaround for Chinese IPOs in New York, with these 5 new listings roughly equal to the total amount of major new offerings from the entire previous 2 years. Investors lost their enthusiasm for such offerings starting in early 2011, following a series of accounting scandals at several major firms.

The rebounding sentiment allowed Autohome to raise $133 million in its IPO, soundly beating its original target of $120 million. Its shares then soared as much as 85 percent on their first trading day, mirroring similar strong debuts for the other recent Chinese IPOs by Qunar (Nasdaq: QUNR), (NYSE: WBAI), (NYSE: WUBA) and Sungy Mobile (Nasdaq: GOMO). Following their strong debuts, all 5 companies have maintained share prices well above their IPO levels.

In last week's other positive development, E-House (NYSE: EJ), China's second largest U.S.-listed real estate services firm, announced a major new plan to raise up to $200 million through a convertible bond offering. That plan was the latest in a steady series of similar bond issues by some of China's top tech firms like Tencent (OTCPK:TCEHY, HKEx: 700), Baidu (Nasdaq: BIDU) and Sina (Nasdaq: SINA), which have collectively raised nearly $5 billion over the last year.

But after those 2 upbeat developments, the news became more downbeat. The first bad news came midway in the week, when a short seller released a report questioning the financials of medical devices maker Mindray Medical (NYSE: MR) (English article). That attack was the latest in a long and steady series of similar ones over the last 2 years that helped to trigger the confidence crisis and sent investor sentiment into a deep freeze. Mindray's shares tumbled 11 percent after the report came out, as its trading volume jumped nearly 10-fold from its usual average. The company helped to control the damage by issuing a statement denying the claims (company announcement). Its shares recouped some of their losses in the next trading day, but still remain down more than 7 percent from their levels before the attack.

Mindray may ultimately survive the attack and see its shares bounce back to their earlier levels, though many companies that came under similar past assaults were not so lucky. Regardless, the attack, which came just 2 months after notorious short seller Muddy Waters launched a similar assault on security software maker NQ Mobile (NYSE: NQ), provided a reminder that recovering sentiment towards U.S.-listed Chinese companies is still quite tenuous.

The final downbeat news came late in the week when E-House announced it would only raise $135 million in its bond offer, representing a one-third cut from the top end of its original target. The steep cuts showed investor sentiment in such bonds was weakening, and once again underscored the tenuous nature of the rebound for Chinese companies.

In many ways last week's mixed news nicely summarizes the market's current attitude towards this group of companies that were once investor darlings but later became pariahs. Positive sentiment has returned to the biggest names like Baidu, Sina and Tencent, helping their shares to soar this year as investors began to feel comfortable again with their accounting and business models. But names like E-House and new listing candidates like Autohome are less well known, making them attractive to short-term speculators but less appealing for long term buyers.

For those reasons, new IPOs and share prices of Chinese firms in general could see continued strong gains in the beginning of 2014. But the mood is likely to weaken in the second half of the year due to high volatility, as both hedge funds and short sellers rapidly buy and sell shares of these companies in pursuit of short-term gains and losses.

Bottom line: Chinese firms listing in New York will see continued strong gains in the first half of 2014, but momentum will quickly fade in the second half.

Disclosure: No positions