Investment Contrarians

SEC Raises Requirement for Chinese Companies for U.S. Listings; Chinese Companies Looking Elsewhere

By for Investment Contrarians |

SEC Raises Requirement for Chinese CompaniesChinese initial public offerings (IPOs) could be hot again this year, but don’t look to America as the breeding grounds: the flow to the U.S. is dead.

The big market for Chinese IPOs will be at home in China where there could be as many as 349 IPOs this year, according to a calculation by Goldman Sachs. (Source: “IPO deep dive: The Sword of Damocles or Paper Tiger?,” Goldman Sachs web site, January 23, 2013, last accessed May 14, 2013.) Of course, we have seen only a trickle this year, so the Goldman estimate seems to be more fiction than fact.

In the U.S., there are no Chinese IPOs scheduled for the immediate future, a stark contrast to the 60 Chinese stocks that debuted on U.S. equities markets from 2008 to 2011.

The more recent numbers look even worse, and tell us a tale of misfortune for Chinese IPOs.

In 2012, there was one Chinese listing on U.S. equities markets, but we saw the delisting of several Chinese stocks that have been taken private. Since August 2011, 23 Chinese stocks have delisted from U.S. equities markets, according to Money Week magazine.

Based on what I have been reading, I doubt that there will be much activity this year or next for Chinese IPOs, unless the rules of engagement for financial reporting and auditing are made better and meet U.S. standards. The Securities and Exchange Commission (SEC) wants any Chinese company aiming for access to U.S. capital markets to use one of four approved U.S. Big Four auditors. That request is fine, but the problem lies in the SEC also wanting access to the underlying data and records that support the financial statements—China has refused to provide that access.

I have no issue with the SEC and believe its requests are the only recourse to try to prevent another reporting scandal associated with a China-based company. There are many Chinese companies that want access to the U.S. capital markets, but for that to happen, these companies must prove that they are clean and trustworthy.

Until that happens, I wouldn’t expect any Chinese IPOs anytime soon. There are still some good Chinese companies listed on U.S. exchanges, but for new deals, you will have to look to China, and I’m not sure if that’s a good idea given the high risk.

The last Chinese IPO was China-based social networking company YY Inc. (NASDAQ/YY), which has surprisingly more than doubled in price since its IPO debut at $10.50 on November 21, 2012. Chinese Internet plays continue to show above-average promise.

The only Chinese IPO that is expected to come onboard in the U.S. is the Beijing-based online retailer LightInTheBox, which is planning to raise nearly $90.0 million in an IPO on the New York Stock Exchange (NYSE).

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