Bottom line: Premier Chinese Internet names should eschew China’s stock markets and continue to make IPOs in New York, where they can gain more accurate valuations and greater access to global capital markets.
Shares of e-commerce giant Alibaba (NYSE: BABA) achieved a dubious milestone late last week, when they officially closed at their lowest price since the company’s record-breaking IPO nearly a year ago. The big rise and subsequent fall of Alibaba’s stock was part of a broader sell-off of US-listed Chinese shares, sparked by an equally large drop on China’s domestic stock markets.
The US sell-off once again cast a spotlight on the question of whether some of China’s most promising private companies should pursue such offshore listings or make IPOs at home where their names are more familiar. Despite occasional volatility like last week’s sell-off, such offshore listings remain the best choice because they provide companies with relative stability and far more accurate valuations than what their peers are getting in China’s immature markets.
Such listings also offer access to international capital markets that are much larger and stable than China’s, and bring greater prestige and credibility for companies in the eyes of investors.
Most of China’s premier Internet names like Alibaba and Baidu (Nasdaq: BIDU) are listed in New York, where their shares tend to move based on individual performance rather than the more herd-like tendency for companies listed in China. Alibaba raised a record $25 billion in its IPO last September, as investors flocked to the China Internet story and the company’s own strong growth prospects.
Its shares then rose as much as 76 percent from their IPO price of $68, hitting a high of nearly $120 last fall. That gave it a market value of nearly $300 billion – larger than global peers like Amazon and eBay that had far longer histories and more diversified and sophisticated business models. But as investors became more familiar with Alibaba and the original excitement faded, the company’s stock gave back all of those gains and closed at a record low of $68.18 at the end of last week.
Other Chinese companies to list in New York over the last year have fared similarly, though each has also followed a trajectory based on its own performance. After rising as much as 43 percent after its IPO last year, leading microblogging site Weibo (Nasdaq: WB) has tumbled recently and now trades 28 percent below its offering price as it faces major challenges from Tencent’s (HKEx: 700) WeChat and other social networking (SNS) newcomers. Alibaba’s chief rival JD.com (Nasdaq: JD) has fared better, and is still up 32 percent from its offering price due to its stronger growth prospects, despite giving back some of its earlier large gains.
Irrational Swings in China
Those swings look big, but each reflects growing investor familiarity with individual companies. That contrasts with even bigger swings, often for no apparent reason, for Chinese Internet firms that have listed at home, often on the Nasdaq-style ChiNext market. One example is online video company LeTV (Shenzhen: 300104), whose shares rocketed 6-fold this year to an all-time high in May, only to lose half of their value since then.
The wildest ride saw shares of online video player maker Baofeng Technology (Shenzhen: 300431) soar 43-fold after their IPO earlier this year, only to lose nearly two-thirds of their value since June amid the recent China sell-off. (previous post) Both LeTV and Baofeng probably would have dropped even more if China hadn’t intervened to prop up the stock markets, and if LeTV hadn’t halted trading in its shares during the sell-off.
The kind of big-scale intervention seen in China seriously undermines the credibility of companies and broader stock markets, since investors can’t freely buy and sell stocks when they want to. The dominant role of unsophisticated retail investors in China also distorts market values, since such small buyers often trade based on rumors and market momentum that can change quickly.
By comparison, stocks like Alibaba and JD.com have moved in different patterns that reflect growing familiarity with their individual stories by more sophisticated western institutional investors. Thus while Alibaba’s decline reflects such growing investor familiarity, Baofeng and LeTV’s movements have far less connection to any reality and are mostly the result of broader market trading momentum.
Faced with this choice, New York should remain the preferred listing choice for promising Chinese Internet companies looking to tap larger international financial markets and also find buyers who can properly understand and value them as their business evolves. Listings in China may sometimes bring higher valuations, but the market’s current turmoil shows such valuations can be fleeting due to their foundation on momentum and broader market sentiment that are always changing.
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