E-House Trims Bond As Investor Appetite Softens

Investors get full on Chinese bond feast

After gobbling up billions of dollars worth of debt from Chinese Internet companies over the last year, investors may finally be starting to get full on the bond feast with word that online real estate services firm E-House (NYSE: EJ) has sharply trimmed its plan for a new major offering. One can interpret this unexpected twist in a number of ways, which I’ll explain shortly. But from my perspective the development looks like one of the first signs that a resurgence of interest in US-listed Chinese tech firms over the last few months could quickly dim in the first half of 2014 as investors turn their attention to other companies.

Let’s begin with a look at the latest news from E-House, China’s second largest real estate services company behind industry leader SouFun (NYSE: SFUN). E-House had announced earlier this week it planned to raise up to $200 million with a convertible bond offering, becoming the latest Chinese Internet company to launch such a fund-raising plan. But now the company has just announced it scaled back its plan to a more modest $135 million. (company announcement) The 5-year bonds have an option to be converted to E-House stock at $16.80 per American Depositary Share (ADS), representing a 30 percent premium to the latest price.

E-House’s offer comes just a week after SouFun raised a larger $350 million through its own convertible bond offering. But in that case, SouFun actually upped its fund-raising target from an initial $250 million after experiencing strong demand, and set the conversion price for the bonds at 40 percent higher than its share price at the time. That trend was similar to other names like Ctrip (Nasdaq: CTRP), Sina (Nasdaq: SINA) and Baidu (Nasdaq: BIDU), which had also raised their targets and set ambitious conversion prices after seeing strong demand for their bonds.

So now that we’ve recounted all the facts, let’s try to figure out what all of it means. China bulls might argue the E-House case is a one-time aberration, since nearly all of the previous companies to offer convertible bonds were leaders in their spaces. Baidu is China’s top search engine, Sina is the leading web portal, Ctrip is the biggest online travel agent and SouFun is the real estate services leader. By comparison, E-House is a distinct runner-up behind SouFun. Thus the bulls would say that E-House couldn’t command the same premium that the industry leaders got.

But others, including myself, might argue that E-House’s lackluster performance is an early sign that the recent frenzy of US investor interest towards Chinese tech firms has reached a peak and could soon start to fizzle. There’s certainly nothing negative about E-House in its latest earnings report, with the company posting a healthy 4-fold increase in operating profit and 43 percent rise in revenue as it returned to net profitability in the third quarter. What’s more, even if E-House is a runner-up in its category, its bankers still would have known that before it announced its original fund raising target and adjusted the figure according to expected demand.

So what does this mean for the future? I expect there’s still a bit of froth in the market, especially after the successful trading debut this week of Autohome (NYSE: ATHM), an online car services firm whose shares soared as much as 85 percent on their first trading day in New York. (previous post) But this latest development could put a damper on any new bond offerings for now, and I do expect we’ll also see sentiment towards new Chinese IPOs in New York gradually fade in the first half of 2014.

Bottom line: A scale-back in a new convertible debt offering from E-House shows investor appetite is fading for such bonds, and augers a similar slowdown in appetite for Chinese tech IPOs in 2014.

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