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August 22, 2012 9:35 pm

Chinese companies face tough sell on US IPOs

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This article is provided to FT.com readers by dealReporter—a news service focused on providing insightful intelligence on event driven situations to investors. www.dealreporter.com

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Chinese companies continue to aim for initial public offerings in New York despite facing a tough sell with skeptical investors that have rejected foreign and domestic deals alike.

“There is no fundamental change to the problems haunting this market,” an equity capital markets banker told dealReporter. “High valuations the companies ask for, legal structure issues and the economic slowdown in China all raise concerns among investors.”

Add to that ongoing market volatility, corporate governance scandals, privatizations and cut-throat domestic competition and Chinese entrepreneurs have their work cut out for them.

Nasdaq-listed Changyou.com said earlier this month it plans to spin off its internet game unit 7Road.com in a US IPO. Liu Qiangdong, chairman of Chinese e-retailer 360buy.com, said the company would raise as much as USD 5bn on the Nasdaq next year, and Beijing-based mobile internet services provider UC Browser’s CFO Rong Shengwen said the company is planning an IPO in the US, according to media reports.

Drug maker Newsummit Biopharma and auto rental services eHi Car Rental are planning US listings, while Lashou, a discount website operator, Cloudary, the online publishing arm of Shanda Interactive, and China Auto Rental all plan to try to come back to the market after shelving previous US IPO attempts, sources familiar with the matter said.

“It is not a problem with any particular industry, but a difficulty confronted by companies from across different industries,” the banker said.

VIPshop [VIPS: NYSE] was the last Chinese company to get listed in the US. Since its IPO in March its shares have dropped 6.73%, while the Dow Jones Index is up 0.94% and the S&P 500 is up 1.14%.

That and the consecutive failures of IPOs from discount website operator Groupon [GRON:NASDAQ], Zynga [ZNGA:NASDAQ], a gaming firm that distributes over social media, and social networking site Facebook [FB:NASDAQ] have helped to cast a pall over Chinese companies, which have often looked to ride on the coat tails of deals done by their US counterparts.

Groupon’s shares are down 82.18% since listing in November last year. The Nasdaq Index is up 14.51% over the same period. Zynga’s are down 44.84% since listing in December last year while the Nasdaq is up 14.73%. Facebook’s are down 47.34% since listing in May this while the Nasdaq Index is up 9.33%.

“Foreign investors usually value IPOs from Chinese companies based on what they are familiar with in the US, as many of them copied their business model from the US,” said one banker that has worked on several Chinese IPOs bound for New York.

Such issues didn’t plague an earlier generation of Chinese Internet companies. Chinese web portals Sina [SINA:NASDAQ] and Sohu [SOHU:NASDAQ] successfully followed Yahoo [YHOO:NASDAQ], online travel agency Ctrip.com International followed Expedia [EXPE:NASDAQ] and web search engine Baidu [BIDU:NASDAQ] followed Google [GOOG:NASDAQ].

In the years when these companies kicked off, the internet was a much newer business model and there were far fewer venture capitalists looking to put money to work in China.

Now however the number of investor-backed technology firms has mushroomed and it can be far from clear which one has an advantage, or who actually leads the market.

Competition has become so fierce that companies are locked in vicious price wars that sap profitability, making them even less popular with investors.

The offshore legal structures Chinese companies use to list in the US also continue to create uncertainty. In the most recent example, the Securities and Exchanges Commission started an investigation in July into New Oriental Education & Technology Group [EDU:NYSE]. It is focusing on the company’s accounting for offshore businesses and wholly-owned subsidiaries.

A number of US-listed Chinese firms have also opted to go private, citing investors, particularly short sellers, that the companies say don’t understand their business.

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