IPOs: Baixing, Alibaba Soccer Go OTC; Giant’s Creaky Backdoor

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Bottom line: Two new China OTC listings for companies that may have previously chosen New York, and slow progress for Giant Interactive’s backdoor listing, reflect fading offshore interest in these companies, as more options emerge for them in China.

Money-losing soccer team plays on China’s OTC

A trio of IPO stories are in the headlines as we head into the new week, led by new listings for online classified ad site Baixing and a soccer club co-owned by Alibaba (NYSE: BABA). But unlike earlier days when these 2 IPO stories might have both surfaced in New York, both are happening on China’s recently launched modest over-the-counter (OTC) board, reflecting shifting capital raising patterns.

The third of these new IPO stories involves Giant Interactive, which was formerly listed in New York but privatized 2 years ago and is trying to return to China through a backdoor listing in Shenzhen. That story has the Shenzhen stock exchange requesting more information from Giant as it seeks to list via a company called New Century Cruises (Shenzhen: 002258). While such a request isn’t too worrisome, it does signal that the return to Chinese stock markets could be a bumpy ride for the many US-listed companies now leaving New York.

The broader theme in these 3 stories is that international investors are losing interest in smaller money-losing Chinese companies, especially in the competitive Internet sector. At the same time, these Chinese companies have found a more receptive audience at home, especially as China rolls out a new series of stock markets that are better suited to their profile. The ChiNext market targeting private high-growth companies has been highly successful since its launch in 2009, and the OTC market is also gaining some early momentum. Shanghai is also planning to launch a strategic industries board as soon as next year for this kind of smaller, private company.

Scoring in the Little Leagues

Against that backdrop comes the news that Evergrande Taobao, the soccer club owned by Alibaba and real estate giant Evergrande (HKEx: 3333), has formally listed on the Chinese OTC board. (Chinese article) Word of this plan first emerged over the summer, and the latest reports indicate Evergrande Taobao has now become the first publicly traded soccer team in Asia. The reports point out the club is still losing money at a rate of about 500 million yuan ($80 million) per year, which is probably why it wouldn’t appeal to anyone in the US or even on one of China’s larger boards.

Next there’s Baixing, which was formerly eyeing a New York listing, but has now submitted documents for its own China OTC listing. (Chinese article) Like Evergrande Taobao, Baixing is losing money, and its losses have grown steadily over the last 3 years to reach 25 million yuan in the first 6 months of this year. Again, it’s not hard to see why US investors may not be interested in such a company in the current climate, and the move to the China OTC must certainly represent a fairly major disappointment from the company’s earlier plans.

Last there’s Giant, which is much larger than either Evergrande Taobao or Baixing, but  whose value is also rapidly shrinking as it attempts its backdoor listing in China. The company’s chief boasted earlier this year that Giant could be worth up to $16 billion, though documents filed just last week indicate it may only get a valuation of around $2 billion if and when it completes the backdoor listing. (previous post)

Now the latest reports are saying that the Shenzhen stock exchange has asked Giant for more information, after the company submitted documents showing its revenue and profits have both been shrinking over the last 3 years. (Chinese article) I wouldn’t say this request is too ominous, but it certainly shows officials are being quite cautious about this kind of backdoor listing. Accordingly, I would probably peg Giant’s chances of success for this particular listing at slightly better than 50-50, perhaps around 60 percent.

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