Rally brings tech stocks to China

HUGO SHONG, the man behind the highest-flying stock in China, says he knew that Beijing Baofeng Technology Co. was destined for big returns.

He just didn’t realize how quickly they’d come. In the 55 trading days since Mr. Shong took Baofeng public on the Shenzhen stock exchange, the developer of online video players has jumped 4,208%. The rally, equivalent to 11 years of gains in Apple Inc., has given Baofeng a price-to-earnings ratio 13 times higher than that of Alibaba Group Holding Ltd.

While the surge has a lot to do with China’s growing mania for equity investment, it’s also emblematic of a shifting attitude among the nation’s technology companies toward local capital markets. Led by Baofeng and Carlyle Group LP’s Focus Media Holding Ltd., the industry is dismantling overseas ownership structures to take advantage of soaring valuations on domestic stock exchanges and government incentives to list at home.

“A lot of Chinese companies are contemplating the same move,” Mr. Shong, a pre-initial public offering (IPO) investor in Baofeng at IDG Capital Partners in Beijing, said in a June 10 phone interview. “Their buyers, products and users are in China. And the country also has the largest mobile Internet population, so they would get a much better valuation.”

NEW ECONOMY

IDG Capital, which worked for about 10 months to prepare Baofeng’s listing, is an investor in at least 20 other companies that may consider coming back to Chinese markets. More than a dozen technology businesses are working on similar moves, according to China Renaissance Partners, a Beijing-based advisory firm.

Beyond enriching shareholders, the deals are helping President Xi Jinping’s government raise the status of Chinese financial markets on the world stage and boost the role of technology businesses in Asia’s largest economy. City and provincial authorities across the country are handing out subsidies to companies that sell shares locally, while Premier Li Keqiang has encouraged firms using so-called variable interest entity ( VIE) structures to list in China.

VIEs, pioneered by Internet portal Sina Corp. 15 years ago, allow firms to get around China’s foreign ownership restrictions. While the structures made sense for companies when valuations were higher on overseas exchanges, the case for unwinding them is getting stronger as mainland markets surge.

CAPITAL WAR

Internet companies on Chinese exchanges now trade at a median 89 times estimated 12-month earnings, versus 25 times for global peers, according to data compiled by Bloomberg. Songcheng Performance Development Co., which took over the assets of video Web site Beijing 6Rooms Technology Co. in March, has a multiple of 71 after more than doubling over the past three months.

The Shanghai Composite Index rose 0.9% at the close of trading on Friday, with a gauge of technology shares on mainland exchanges slipping 0.1%.

Attracting capital at higher prices is becoming more important for Chinese Internet companies as competition in the industry intensifies, according to Bao Fan, the founder of China Renaissance.

“There’s a capital war,” he said. “The ability to fund becomes a strategic advantage.”

The shift isn’t without risks. Many investors view China’s stock market rally as a bubble, with Janus Capital Group, Inc.’s Bill Gross saying shares in the tech- heavy Shenzhen market will become the next big trade for short sellers. Baofeng is valued at 715 times reported earnings, versus 55 for Alibaba, the Chinese e-commerce company that went public in the US last year.

GOVERNMENT SUBSIDIES

Companies without overseas listings may also have less leeway to challenge China’s control over their content, said Jason Ng, a New York-based research fellow who focuses on Chinese Internet censorship at Citizen Lab.

Policy makers regularly filter local and overseas Web sites to restrict citizens’ access to information. The information office of China’s State Council didn’t respond to a faxed request for comment.

For some companies, regulatory efforts to boost the appeal of mainland markets outweigh any concerns over censorship.

Local governments from Tianjin to Guangdong are offering subsidies to businesses that list on China’s New Third Board, an exchange for smaller firms that started expanding nationwide in 2013. Technology companies made up about 23% of shares on the bourse last year.

NEXT GENERATION

“The cost of listing in China is a lot cheaper than in the US,” said Jarod Ji, an analyst at Zero2IPO, a Beijing-based research firm. “There’s also policy incentives, and government subsidies sometimes even cover the listing fees.”

On China’s biggest bourses, relaxed restrictions on overseas investors allow companies to list at home and still gain exposure to foreign capital. An exchange link in Shanghai lets anyone with a Hong Kong brokerage account buy mainland shares, while a similar program will open in Shenzhen this year.

As IDG Capital’s Mr. Shong sees it, there are few limits to what Chinese Internet companies can achieve on mainland bourses.

He’s setting his sights on three of China’s biggest Internet giants with overseas listings — Baidu, Inc., Alibaba and Tencent Holdings Ltd.

“We want to create the next generation of BAT on China’s stock market,” Mr. Shong told investors in a five-star hotel ballroom the day of Baofeng’s listing in Shenzhen. “We hope that Baofeng can become that B.”

CHINA LEADS OUTFLOW

Meanwhile, investors pulled a record amount of money from emerging market stock funds last week as rising global borrowing costs and MSCI, Inc.’s decision to hold off on adding China’s yuan-denominated shares in its indexes weighed on investor sentiment, according to Barclays Plc and EPFR Global.

Funds posted $ 9.2 billion of outflows in the seven days through Wednesday, $6.8 billion of which was from those investing in China, Barclays said in a research note, citing EPFR data. Traders have pulled $26 billion from emerging market funds this year, surpassing the total of $24 billion in all of 2014, the data show.

The MSCI Emerging Markets Index declined for 12 straight days through June 9, the longest losing streak since 1990, amid concern rising borrowing costs in Germany and the US will lure capital away from developing nations. MSCI said Tuesday that it will work with Chinese regulators to sort out some issues about market access before adding local shares to its emerging market benchmark, disappointing some investors looking for an immediate inclusion.

Investors also withdrew $500 million from emerging market foreign currency bond funds and $320 million from local currency funds during the week, according to the Barclays note. — Bloomberg