By Leslie Picker and Fox Hu Jul 1, 2014 6:50 AM PT
July 1 (Bloomberg) — Daniel Martin, Asia economist at Capital Economics, discusses the prospects for economic growth in China with Rishaad Salamat on “On The Move Asia.” (Source: Bloomberg)
JD.com Inc. (JD) decided to push ahead with its initial public offering last quarter even as Internet stocks tumbled, volatility climbed and other technology companies delayed their share sales.
It went ahead because JD.com has one thing that many closely held candidates don’t: China. The Beijing-based online marketplace raised $2 billion in its May IPO, making it the biggest example of a trend where mainland-based technology companies attracted buyers in U.S. offerings.
For those investors, a surging Internet consumer base coupled with the higher returns of U.S.-listed Chinese companies encouraged them to scoop up shares. In the second quarter, companies based in China raised $3.5 billion through IPOs in the U.S., the most since the last three months of 2007, data compiled by Bloomberg show. This quarter is poised to be even bigger, with Alibaba Group Holding Ltd. (BABA)’s IPO slated to raise the most ever in the U.S.
“Even in choppy markets, the best companies in China can get deals done,” said Chet Bozdog, co-head of global technology, media and telecommunications investment banking at Bank of America Corp., which led JD.com’s IPO. “There’s extra investor interest right now in investing in Chinese companies, and that’s why the Chinese companies decided to move forward.”
U.S.-based companies that went public this year have increased 21 percent on average since their debuts, data compiled by Bloomberg show. Their China-based counterparts have jumped 33 percent following U.S. offerings.
The sharpest decline in technology stocks this year took place before JD.com began marketing the IPO to investors. Still, the backdrop to its first week of investor meetings in mid May was a three-day decline in Internet stocks and the biggest retreat in the Standard & Poor’s 500 Index in a month.
JD.com proceeded with the sale even as U.S.-based technology companies Arista Networks Inc., MobileIron Inc. and Box Inc. delayed their offerings to wait for better conditions, people with knowledge of the matter said early in the month.
Companies based in China accounted for 63 percent of the money raised by technology and Internet firms that went public in the U.S. in the three months through June, according to data compiled by Bloomberg.
Micro-blogging service Weibo Corp. and Web-based cosmetic retailer Jumei International Holding Ltd. were among the 10 Chinese companies that went public during the quarter. The shares of both companies have climbed more than 20 percent since their debuts.
“Investors always like to buy what’s worked,” said Greg Lesko, a New York-based fund manager at Deltec Asset Management LLC, which oversees $800 million including emerging-market stocks. “China’s growth prospects are strong and their business models are similar to companies here. The fact that these IPOs have done well will create more interest.”
Chinese Internet users have grown to 618 million and could exceed 850 million by 2015, according to government data. McKinsey & Co. predicts online retailing in the world’s second-largest economy will reach $395 billion next year, triple its 2011 level.
U.S. investment in Chinese Internet companies slowed in late 2011 and 2012 as profit warnings, auditor disputes and delistings fueled investor distrust. As those issues waned, U.S. investors returned. When China’s securities regulator froze approval for domestic IPOs amid a crackdown on fraud and misconduct, more companies sought the U.S. public market.
“The problem with the U.S. investment world is that they have an arm’s length philosophy when it comes to China,” said Jeff Sica, president of Morristown, New Jersey-based Sica Wealth Management LLC, which oversees $1 billion in assets. “They would rather take the ’ignorance is bliss attitude’ and just look at the growth.”
One issue that remains is the way Chinese companies structure themselves when they go public in the U.S. — as variable interest entities, or VIEs — designed to circumvent the Chinese government’s restriction on foreign ownership of key industries.
VIEs, which create holding companies to link foreign investors to Chinese firms via a set of complex legal contracts, are a shareholder risk, according to a U.S. congressional commission report last month.
There’s a “high probability” Chinese courts won’t uphold the contracts behind the structure, according to the report. The U.S. should engage China on remedying VIE risks by eliminating Internet restrictions, liberalizing financial markets and clarifying the legal status of VIEs, the report shows.
That isn’t dissuading Alibaba, which could go public as soon as August, people familiar with the matter have said.
Analysts surveyed by Bloomberg estimate Alibaba’s valuation to be $168 billion. The Hangzhou-based company is looking to sell a 12 percent stake, people familiar with the matter have said, which could mean an IPO of around $20 billion, which could make the IPO the largest ever.
Alibaba decided to list its shares in the U.S. after it was unable to persuade Hong Kong regulators to change rules to give founder Jack Ma and other executives a unique way to control the company that the U.S. allows.
“Investor confidence in Chinese companies has been restored,” said Steve Wang, chief China economist at Reorient Financial Markets Ltd. in Hong Kong. And given that Hong Kong forbids shareholding structures preferred by companies such as Facebook Inc. and Alibaba, “their choice of venues is further limited.”
Still, Alibaba’s IPO may be a double-edged sword — creating a “no-win” situation for other Chinese companies, Sica said. If the e-commerce giant’s IPO succeeds, it will absorb a lot of the liquidity out there; if the IPO fails, that disappointment will cast a negative shadow onto the whole sector, he said.
If JD.com is any indicator, Alibaba’s prospects look good: JD has gained 50 percent since its May 21 IPO, when its shares were priced above the marketed range.
“Over the last quarter, JD.com and several other deals have performed very well, and as investors see that, they become even more interested in those types of investments,” said Bank of America’s Bozdog. “We expect to see continued growth in the number of IPOs coming out of China.”
To contact the reporters on this story: Leslie Picker in New York at firstname.lastname@example.org; Fox Hu in Hong Kong at email@example.com
To contact the editors responsible for this story: Mohammed Hadi at firstname.lastname@example.org Elizabeth Wollman