In 2010, a record number of China-based companies sought listings in the US, representing 27% of deal activity that year. US investor appetites were strong for opportunities to capitalize on China’s growth prospects and emergence as a world leading economy. In 2011, however, a breakout of fraud brought on by insufficient financial controls and disclosures created skepticism of these companies over lofty growth rates and margin expansion business plans, causing Chinese IPOs to quickly fall out of favor. 2011 saw Chinese IPO deal flow fall 71% as demand evaporated. Only one of the 12 deals that priced in 2011 posted positive performance that year.
Investors remained wary in 2012
The generally negative trends and bleak outlook related to Chinese IPOs continued in 2012, as four deals withdrew their offerings and only two managing to price. Deal flow fell another 83% year-over-year or 95% from its 2010 highs. Of the 12 Chinese IPOs in 2011, six produced negative returns year-to-date, three are essentially flat and three have generated positive returns. Tudou Holdings, one of the positive performers, was acquired in March for a valuation ultimately lower than its 2011 offer price. Most recently, the SEC has bought administrative action against the Big Four accounting firms’ Chinese affiliates, a result of accounting scandals that added to the erosion of billions of dollars of shareholder value.
Bright signs emerge on the 2013 horizon
While 2012 certainly did not offer a robust turnaround for Chinese IPOs, a closer look at the two deals that were completed, however, reveals what could be the onset of a trend reversal. Vipshop Holdings (VIPS), a “flash sales” website in China, and YY (YY), a Chinese social platform, were the only two Chinese companies to go public in the US in 2012. Both companies were met with initial pricing pressure (VIPS priced a downsized deal below the range and YY priced at the low end of the range); however, each has ultimately produced solid aftermarket gains. VIPS, up 92% from its offer price, has been able to grow market share and deliver margin expansion due to leverage on pricing and fulfillment expenses. YY, up 25% from its offer price, drew investor interest from its 160%+ top-line growth year-to-date and growing monetization (ARPU was up 53%).
The solid performance from VIPS and YY could prove to be a strong indicator that investor confidence is building in Chinese IPOs, albeit slowly. Should investors start to seek out Chinese IPOs in 2013, a pipeline of Chinese companies seeking US listings exists to meet that demand, including Changyou.com spinoff, 7road.com, lingerie B2C e-commerce platform Moonbasa and China's largest online clothing retailer, VANCL. Our Private Company Backlog currently has 15 China-based companies that could come to market in the US in the next 12-18 months.
Please contact us for more information on our Private Company Backlog or how to obtain the complete list of expected 2013 Chinese IPOs.
