Firms' stateside offerings suffer their longest decline in six years
NEW YORK: Initial public offerings by Chinese companies in the US are suffering their longest slump since at least 2004 after providing twice the return of American IPOs over the past five years.
Chinese companies that sold shares in the US last quarter fell an average 4.8 percent in their first month of trading, with losses deepening to 6.7 percent for companies that debuted in January and February, the most consistent retreat since Bloomberg began tracking the data.
Demand is waning after investors paid more than twice the so-called tangible net assets to buy shares of companies from China Nuokang Bio-Pharmaceutical Inc, whose profits stagnated in 2009, to China Hydroelectric Corp, which has reported four straight years of losses.
While the country's economy is forecast to expand more than three times as much as the US this year, the central bank is moving to rein in lending and growth just as a global slump in IPOs deepens.
"If you're looking to reduce risk it's probably the first market to exit," said Madelynn Matlock, the Cincinnati-based manager of the Huntington International Equity Fund at Huntington Asset Advisors, which oversees $15 billion. "Too many public offerings from China coming too quickly to market, combined with less risk appetite and the monetary tightening in China, have spooked investors."
Consumer confidence
The Bloomberg IPO Index of 63 companies on American exchanges has slipped 3.5 percent in 2010 as US consumer confidence slumped to the lowest level since April and investors speculated that Europe's widening budget deficits would slow the global economic recovery.
The MSCI AC World Index of developed and emerging equity markets completed its longest stretch of weekly declines in almost a year this month and is down 3.4 percent in 2010.
US companies from Imperial Capital Group Inc in Los Angeles to Fort Lauderdale, Florida-based Patriot Risk Management Inc have postponed IPOs this year, while New York-based Blackstone Group LP's Travelport Ltd and New Look Group Plc of Weymouth, England, pulled London offerings this month.
The performance of Chinese IPOs in the US began to deteriorate last quarter. Investors in five of the seven companies that completed deals suffered losses in the first month of trading, while buyers of 16 of the 24 offerings by American companies made money, data compiled by Bloomberg show.
China Nuokang, based in Shenyang, Liaoning province, raised $45 million selling ADRs, according to a Dec 9 filing with the US Securities and Exchange Commission. The IPO valued the company at a 135 percent premium to its $3.83 in per share tangible book value, a measure of shareholder equity that excludes assets that can't be sold in liquidation.
The maker of blood coagulants derived from snake venom reported that net income in the first nine months of 2009 was little changed from the previous year at 41.6 million yuan ($6.1 million), the filing showed.
The company's ADRs, which represent eight common shares, fell 16 percent in the first month on the NASDAQ. ADRs represent ownership stakes in overseas companies that are issued by US banks and usually trade on American exchanges.
'Speculative money'
"There's more risk in Chinese IPOs," said Jim Porter, founder of Hinsdale, Illinois-based New Century Capital Management LLC. "You're buying with less knowledge and less experience with IPOs from that country and a lot of the time people barely get a chance to see what's in the prospectus. It's more speculative money."
Losses have accelerated as China's central bank increased banks' reserve requirements twice this year to curb inflation and damp asset prices.
Policymakers are reining in credit after banks extended 19 percent of this year's 7.5 trillion yuan lending target in January and property prices climbed the most in 21 months. Record lending and a 4 trillion yuan stimulus package had helped China lead the recovery from the first global recession since World War II.
The economy is forecast to expand 9.5 percent this year, according to economists surveyed by Bloomberg.
Daqo, JinkoSolar
So far this year, only one of the four Chinese companies that have completed IPOs gained, Bloomberg data show. Chongqing-based Daqo New Energy Corp and JinkoSolar Holding Co of Shangrao in Jiangxi province have shelved plans to sell shares in the US.
China Hydroelectric, the Beijing-based operator of small-scale hydropower plants, raised $96 million selling ADRs and warrants at $16 per unit last month. The biggest of the Chinese offerings this year valued the company at a 188 percent premium to its tangible book value. The ADRs have since fallen 36 percent.
Chinese offerings on US exchanges from Baidu Inc to Suntech Power Holdings Co enriched investors over the past five years. Shares of 67 mainland and Hong Kong companies gained 22 percent on average in the first four weeks of trading during that period, beating the 11 percent advance for US IPOs, Bloomberg data show.
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