How quickly things can change! China tech stocks are suddenly back in vogue on Wall Street after more than 2 years of frigid sentiment, as evidenced by an unexpected surge in demand for 2 new offerings from classified ads site 58.com (NYSE: WUBA) and online travel agent Qunar. My initial reaction to the strong demand is relief, since it previously looked like shares of Chinese tech firms might remain in an endless winter after a series of accounting scandals in 2011 that rocked investor confidence. But now I’m just a bit concerned that this sudden explosion in interest may lead to unrealistic expectations for these companies, causing turbulence for their shares.
All that said, it’s hard to find any negative news in the latest offerings by 58.com and Qunar, which are only the second and third major New York IPOs by Chinese tech firms this year. The good news started earlier this week when media reported that both companies sharply raised their IPO price ranges due to strong demand, allowing them to raise more money than previously planned.
58.com has become the first of the pair to go public, raising $187 million after selling its American Depositary Shares (ADSs) for $17 each — well above its previously announced range of $13-$15 per ADS. (English article; Chinese article) Even after that big price hike, the shares were still in big demand on their trading debut, rising as high as $27 before finally closing the day at $24.12 for a 42 percent gain.
Media previously reported that Qunar was also seeing strong demand for its shares, prompting it to raise its price range to $12-$14 per ADS from an original $9.50 to $11.50 range. (previous post) Shares of Qunar, which is controlled by Internet search leader Baidu (Nasdaq: BIDU), are set to start trading on Friday in New York, and I would expect we’ll also see them post some nice gains on their debut. The strong demand should be good news for 2 other tech firms, lottery site operator 500.com and app developer Sungy Mobile, which are also preparing New York listings before the end of this year. (previous post)
This sudden new interest in China tech IPOs comes as investors have also rediscovered a fondness for Chinese tech stocks, many of which have rallied strongly over the last few months. Two of the 3 major Chinese tech IPOs in New York over the last 2 years have also done well. Shares of online discount retailer Vipshop (NYSE: VIPS) are up more than 10-fold from their March 2012 IPO price, while commercially focused social networking site YY (Nasdaq: YY) is up nearly 5 fold from its IPO about a year ago. The third major offering from e-commerce site LightInTheBox (NYSE: LITB) initially surged after its IPO in June this year, but the shares later gave back all their gains on concerns about the company’s future prospects and now trade slightly below their IPO price.
So what do I make of all this? If I were an investor, I would certainly try to get my hands on some of these upcoming IPO stocks, as most shares look almost certain to post nice gains on their debuts and perhaps into their first few weeks of trade. But over the longer term, I really do worry that these stocks will become overvalued and thus will look attractive to short seller.
We saw one such attack last week on security software make NQ Mobile (NYSE: NQ), whose shares lost half their value after notorious short seller Muddy Waters released a report calling the company a massive fraud. I personally think these newly listed companies will be less vulnerable to such attacks, since their accounting records have come under greater scrutiny after a recent sector cleanup. Still, I wouldn’t advise anyone with weak stomachs to invest in these shares right now, as they could be highly volatile in the months ahead until the new euphoria starts to subside.
Bottom line: Strong demand for 58.com and Qunar shares should help boost new China tech IPOs in New York, but prices could be highly volatile for the next 6 months.