IPOs: Autohome Cuts As Trading Volumes Shrivel

Autohome cuts IPO size

An interesting picture is emerging from the mini-rush of Chinese IPOs now hitting the market, as reflected by word that online car seller Autohome has cut the size of its upcoming New York offering. On the one hand, the 4 companies to launch IPOs in the last month have all seen their shares perform quite well since their trading debuts. But at the same time, the size of the offerings has been rapidly shrinking, and all have seen their trading volumes drop dramatically since their first trading days. That seems to indicate the market is filled with speculators right now, and there’s much less longer-term interest in the companies once their shares start trading.

So what does that mean for these stocks over the next few months? The answer is that their stocks will be highly volatile, since low volume means just a few traders can influence the companies’ stock prices with large trades. That means these companies could easily become the target for opportunistic short sellers in the next few months, following their impressive gains in their first few weeks.

All that said, let’s look at the latest news that has Autohome cutting the size of its IPO to a maximum of about $100 million, or about 15 percent less than the original $120 million it was hoping to raise. (English article; previous post) The company has also set a price range for the offering, aiming to sell 7.8 million American Depositary Shares (ADSs) at $12-$14 each. The deal is being underwritten by Goldman Sachs and Deutsche Bank, which have been 2 of the main banks on several of the recent deals.

Autohome’s decision to cut the offering follows online lottery ticket seller 500.com’s (NYSE: WBAI) cutting the size of its IPO by more than half before its shares made their debut last month. Other offerings by online travel agent Qunar (Nasdaq: QUNR), classified advertising site 58.com (NYSE: WUBA) and Sungy Mobile (Nasdaq: GOMO) all managed to reach their fund-raising targets, and Qunar and 58.com both actually raised more than their original targets after seeing strong demand for their shares in late October.

Shares of all 4 companies have done quite well since their trading debuts, with 58.com posting the best performance and now nearly double its IPO price. Qunar is up 76 percent, while 500.com is up 56 percent and even Sungy is up by more than a third.

But a more interesting picture emerges from the trading volumes for all 4 companies since their debuts. 58.com is a good case that illustrates what has happened to the whole group. The company saw a whopping 20.6 million of its ADSs change hands on its first trading day, even though it only sold 11 million ADSs in the offering. In the month since then, its daily volume has only exceeded 1 million shares 8 times, and has consistently remained around the 800,000 level.

While high volumes on trading debuts and lower ones after that aren’t unusual, the huge difference in these cases seems to point to a high degree of speculation in the market. I’ve previously said that the big investment banks underwriting these deals are probably asking their deep-pocketed investor clients for help to make these offerings look successful, which should convince more Chinese companies to go public after a 2 year lull with very few new listings.

So what’s ahead for these stocks? As I’ve said above, I do think these stocks are being artificially inflated by speculators and low trading volume, making them attractive targets for short sellers. I doubt we’ll see any of the notorious names like Muddy Waters pounce on these newbies just yet. But that said, I wouldn’t be surprised if these companies do come under some smaller attacks and their share prices settle down a bit in the months ahead.

Bottom line: Autohome’s cutting of its IPO and low trading volumes for other newly listed Chinese stocks show investor interest is waning in the group, which could become vulnerable to short sellers.

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