Alibaba, CAR Soar In NY, HK Trading Debuts

China Auto IPO draws on Alibaba fever with strong debut

I’m a bit reluctant to write more today about the historic New York IPO for e-commerce giant Alibaba (NYSE: BABA), whose extremely strong trading debut surprised even me. But I would be somewhat remiss if I didn’t at least mention the final phase of this massive offering, which has made Alibaba the world’s second largest Internet company behind only Google (Nasdaq: GOOG). At the same time, another far more low profile trading debut in Hong Kong for auto rental specialist CAR Inc (HKEx: 699) has also done quite well, extending a nearly yearlong window for overseas listings by Chinese firms.

I expected Chinese companies to do well this year with new overseas listings, as the sector emerged from a 2 year downturn sparked by a series of accounting scandals dating back to 2011. But I never expected the surge in sentiment, which began last fall, to last this long. All that said, I do believe that Alibaba’s blockbuster offering is probably the main factor that’s helped to extend the strong sentiment for so long, and that investor enthusiasm will finally start to fade and the current IPO window will probably close by the end of this year.

At this point it’s mostly redundant to recount the details of Alibaba’s trading debut, which saw its American Depositary Shares (ADSs) surge to end their first day at $93.89, up 38 percent from their elevated IPO price of $68. (Chinese article) That jump gave Alibaba a market value of more than $230 billion, well beyond the $150 billion for China’s previous most valuable Internet company Tencent (HKEx: 700). By comparison, Google now has a market value of about $400 billion, while Amazon (Nasdaq: AMZN) and Facebook (Nasdaq: FB) are valued at about $150 billion and $200 billion, respectively.

I won’t waste too much more space writing about the actual offering, though congratulations are certainly in order for Alibaba’s charismatic founder Jack Ma for making his IPO such a success. As I’ve said before, I do think that Alibaba will have a difficult time maintaining its momentum for too long and investors will quickly begin to question the stock’s current meteoric valuation. Accordingly, I would expect the shares to perhaps maintain their current levels for the next month or maybe even two, but then to slowly come down to levels valuing it more closely with Tencent.

Next let’s look at CAR, formerly known as China Auto Rental, whose Hong Kong listing was overshadowed by Alibaba’s but was also quite a success. The auto rental specialist, whose investors include US giant Hertz (NYSE: HTZ) and Warburg Pincus, saw its shares jump 29 percent in their Friday trading debut in Hong Kong, rising from their IPO price of HK$8.50 to end their first trading day at HK$10.96. (English article; Chinese article)

This particular IPO has quite a history, dating back more than 2 years when it tried to make a offering in New York originally set to raise up to $300 million. But it ultimately scrapped the plan due to a frigid climate for Chinese offerings at that time. This time the company actually boosted its target and ultimately raised $467 million after pricing the deal at the top of its range. Investors were inevitably attracted by the company’s market leading position, as well as strong growth potential that is expected to see China’s auto rental market expand by an average of 27 percent annually over the next 5 years.

In this case CAR’s strong debut looks at least partly tied to the big success of Alibaba, as investors scrambled to purchase anything with the “IPO” and “Made in China” labels. That’s not to say that CAR isn’t a good long-term investment, as the market is clearly set for growth. But in the near near- to mid-term, I do expect we’ll see a pullback in CAR’s shares to levels at or perhaps slightly below their IPO price within the next year.

Bottom line: Alibaba shares may post modest gains for the next 1-2 months, but then will start to pull back, while China Auto shares are likely to move steadily down following their strong trading debut.

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