Bottom line: The hugely successful ChiNext IPO for video player maker Baofeng could draw more Chinese tech start-ups to consider listings at home, even though doing so will make their shares subject to huge volatility.
A video player maker called Baofeng (Shenzhen: 300431) is creating a storm on China’s Nasdaq-style ChiNext enterprise board, with a record-breaking meteoric rise for its shares following a late March IPO. The listing marks the end of a long path to market for Baofeng, which originally envisioned an IPO in New York but later abandoned that plan for a listing at home. The company’s hugely successful reception on the ChiNext also charts a potential major new path to market for Chinese tech start-ups, providing an attractive alternative to New York listings that have been the preferred path up until now.
I haven’t written much before about Baofeng, which makes a popular video player that works both on desktop computers and smartphones. One of my brief mentions came back in late 2011, when media reported the company had selected underwriters for a New York IPO. But then it abruptly abandoned those plans and said in April 2012 it was opting for a listing on the ChiNext, the Chinese enterprise board launched in 2010 for fast-growth, mostly private companies. (previous post)
Even that second plan was delayed for 3 years, though Baofeng posted profits in 2012 and 2013, before moving into the red in the first quarter of this year with a 32 million yuan ($5.2 million) loss. Despite that mixed performance, the company finally managed to make its trading debut on March 24, selling 30 million shares at 7.14 yuan each to raise a modest 214 million yuan, or about $35 million. (Chinese article)
Fast forward to the latest trading session on Monday, when Baofeng’s shares officially closed at a staggering 134.79 yuan — up 19-fold from their original IPO price, giving the company a market capitalization of about 16 billion yuan. One media report is pointing out the company’s shares rose by the daily market limit of 10 percent on 27 trading days since their debut, breaking a record previously held by a traditional company called Lanzhou LS Heavy Equipment (Shanghai: 603169). (Chinese article)
Of course this latest IPO story needs some larger context, namely the fact Baofeng made its offering right in the middle of China’s biggest bull market of the last decade. That market has seen the Shanghai index more than double since last fall, with many stocks regularly trading up by their daily 10 percent limit for no apparent reason.
Still, the fact that Baofeng has able to break the stock market record, even though it lost money in its latest quarter, testifies to the growing attraction of listings at home for Chinese tech firms. An older ChiNext-listed firm, online video company LeTV (Shenzhen: 300104) has also become an Internet superstar over the last year, as its Shenzhen-listed shares quadrupled during the current rally. That has given it a market value of 106 billion yuan, and also an extremely rich price-to-earnings ratio of nearly 200.
While Baofeng and LeTV have found recent riches in China listings, the same can’t be said for a wide range of other Chinese Internet firms that have taken the more conventional listing path in New York. That fact has led a growing number of second-tier Chinese Internet names to abandon their New York listings through privatizations, and many could be eying future re-listings back in China as they try to follow the recent success of companies like LeTV and now Baofeng. (previous post)
This kind of thinking is certainly logical, and explains why companies in general often prefer to list in their home markets where local investors are more familiar with their names. But Baofeng and LeTV also reflect the big risks that come with a China listing, namely the huge volatility that such listings brings. Such volatility could ultimately prove a huge headache, especially when shares tumble. But for now at least, examples like Baofeng should act as big incentive for Chinese Internet firms to strongly consider listings at home on the ChiNext to the more conventional New York route.