After the IPO freeze
As the China-US IPO pipeline restarts, recent history offers lessons for companies, investors and regulators, China Daily’s Michael Barris reports from New York.
Alan Guo’s few words said it all. Asked in June whether the IPO of online retailer LightInTheBox would restart the China-US IPO pipeline, the CEO replied: “I can only speak for LightInTheBox. We are a unique company. Every company needs to go through their own process to get results.”
The company’s strong, widely watched debut on the New York Stock Exchange (NYSE) ended a seven-month drought of initial public offerings in the United States for Chinese companies, a sign that a troubled chapter of US-China financial history perhaps was closing.
Amid a rash of fraud and accounting scandals, more than 100 Chinese companies listed on the NYSE were delisted or suspended from trading through 2011 and 2012. The plunge in share prices as cross-border Chinese listings collapsed wiped out more than $40 billion of value, sending investor sentiment into a deep freeze and ushering in an era of mistrust of US-traded Chinese shares. The number of US IPOs from Chinese companies dived to two in 2012 from 11 in 2011 and 41 in 2010. thoughtful”.
Going public is “a strategic decision that most companies will only make once,” the report said. Companies planning to go public and their advisers must resist the urge to be influenced by “emotive factors and prestige” and seek a spot in a market that fits their specialty and economic characteristics.
For instance, the report said, while US markets are “comfortable with larger and betterknown Chinese companies, many of which are significant on a global level”, they are “not confident with smaller, less-well-known ones”.
Companies also are urged to go where the best advisers are. Expertise in Chinese-mainland companies tends to be concentrated in Hong Kong while Toronto has a concentration of experts in junior miners. London is home to experts in large resource companies, and the United States in technology companies, according to the report.
Although cross-border listings will “continue to be valuable for companies, investors, and exchanges alike,” the lesson of the Chinese delisting debacle is that “each must be more circumspect in their approach and take concrete steps to avoid a repeat”, according to the report.
Cogman said his recommendations are eminently implementable.
“There is a long-standing history of collaboration between other pairs of countries,” he wrote in the email. “Even though regulators don’t always agree and don’t pursue exactly the same objectives, they are able to reach pragmatic compromises.”
Given the lack of history between the SEC and its Chinese counterpart, the Chinese Securities Regulatory Commission, “familiarity and trust on both sides will need to be developed”, Cogman said.
“That said, looking at the achievements in financial regulation in China in the past decade — for example, new accounting standards based on international standards — it should be possible to work out a way to handle cross-border regulatory oversight as well,” he said. “Regulatory changes in the US could also benefit companies from other countries that are interested in being listed in the US.”
Cogman said he sees signs that the newest US-traded Chinese companies are avoiding the pitfalls that characterized the earlier collapse.
“The types of companies now coming to market are generally companies where there is a good logic for them listing in the US vs. listing elsewhere, and they have businesses that are well-understood by the US investment community,” Cogman wrote.
“So we’re seeing listings that on the whole make sense, unlike what we’ve seen at times in the past when there was an IPO pipeline of mid-market companies that didn’t really belong in the US equity markets.”
Still, he said, it is “early days: the pipeline of Chinese companies interested in a US listing only recently re-started and we haven’t seen many listings yet”. Contact the writer at firstname.lastname@example.org
China’s online sports lottery service provider 500.com started trading at the New York Stock Exchange on Nov 22 in New York.