No Buyers for China Mobile Games IPO 中国手游上市无买家

A major catalyst is clearly needed to thaw the current frigid market for US-listed Chinese stakes, but unfortunately the newly listed China Mobile Games (Nasdaq: CMGE) was not what investors were seeking. Meantime in other Internet news, video sharing leader Youku Tudou’s (Nasdaq: YOKU) first major strategy announcement since closing its historic merger a month ago has also failed to inspire investors, who are already running out of patience with the company.

Let’s look at China Mobile Games first, as its case reflects the prolonged winter plaguing US-listed Chinese stocks, which are suffering from a confidence crisis created by a series of accounting scandals that never seems to end. China Mobile Games has just listed in New York, becoming the first Chinese company to list on the Nasdaq this year and one of only a handful to list in the US at all in 2012. (English article; Chinese article)

The company chose the unusual method of listing by introduction rather than through a conventional capital-raising IPO, meaning it raised no money in the process but instead simply listed its shares and let traders determine its share price. Use of this unusual listing method, combined with the frosty market sentiment towards Chinese stocks, resulted in a huge gap between buyers and sellers on the stock’s first trading day, with sellers looking for $40 a share while bidders were only willing to offer $3.90. As a result, no shares were traded on the first day and the company has yet to set a real share price or market valuation.

A quick look reveals the company’s financials are quite strong, with net profit margins of greater than 60 percent and positioning in a mobile gaming market that should see very solid growth over the next decade. I suspect this IPO caught investors by surprise, since the company probably did little or no marketing for it, and we’ll see some higher offer prices coming in as people have a closer look at the numbers. Still, the huge gap in buyer and seller expectations underscores the fact that the winter for US-listed Chinese stocks will probably continue until at least the end of the year and probably well into 2013.

Meantime, investors have greeted the first strategic plan from newly merged Youku Tudou with little enthusiasm, bidding down the company’s shares by more than 3 percent after an official announcement of the new vision. (company announcement) I won’t go into too much detail about the plan here, but it looks like the company plans to reposition the Tudou band as a more niche-oriented site focused on youth and fashion, while the larger Youku brand will remain a site for more mainstream video-sharing.

The drop in the company’s shares isn’t really anything new, since Youku’s stock has moved steadily lower after an initial jump when the companies first announced their merger back in March. Youku shares were trading at $25 before the merger announcement, then jumped as high as $32 shortly afterwards. But since then they’ve gradually sunk to their current levels, with the stock’s latest closing price at $17.54.

It’s obviously still much too early to say that this merger is running into problems, and I think we’ll probably see some improvement as the Youku Tudou starts to integrate and show some positive results from the marriage. But it will still be tough going forward, and I don’t really see any major upside for the stock until the day when Youku Tudou finally earns a profit, which is likely still a year or more away.

Bottom line: A weak debut for the latest Chinese IPO in the US and bad reception for Youku Tudou’s first strategic announcement mean the winter for US-listed Chinese stocks will continue into 2013.

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