The latest developments for New York listed e-commerce firm LightInTheBox (NYSE: LITB) and Singapore-listed China Mingzhong Food (Singapore: MINZ) are showing just how fragile a nascent turnaround for battered overseas-listed Chinese stocks could be. Shares of the recently listed LightInTheBox have plunged over the last week following a weak earnings report, bringing them close to their IPO level after an initial surge in their June trading debut. Meantime, Mingzhong shares have plunged even more rapidly, losing half their value after a short seller attack questioning some of the company’s financials.
These 2 developments show that while the worst of a 2-year-old confidence crisis towards overseas-listed China stocks may have passed, investors still remain skeptical about many of these companies due to their aggressive accounting practices. The lingering skepticism may lead some IPO candidates that have been waiting 2 years or longer to postpone their listings further still, meaning we may only see another 2 or 3 new offerings this year by such firms in major markets like New York and Hong Kong.
Let’s start off with LightInTheBox, whose strong performance after its June IPO led some to say that perhaps the investor confidence crisis that began in early 2011 was officially finished. LightInTheBox shares initially more than doubled after the listing, jumping to as high as $22.21 earlier this month from their IPO price of $9.50 per American Depositary Share (ADS). But the shares tumbled last week after a weak earnings report, which included a profit that was below expectation and forecast for a sharp slowdown in revenue growth in the current quarter. (previous post)
LightInTheBox shares fell to as low as $9.67 last week, coming dangerously close to their IPO price, though they have bounced back a little since then and now trade at just above the $10 mark. Frankly speaking, I’m not too surprised at the weak report since it’s not uncommon for companies to manipulate their financials slightly before their IPOs to make the offerings as attractive as possible. We’ll really have to wait for LightInTheBox’s next results to see what its real situation is, and I suspect we could see some upside for its shares if its situation looks more stable in its next results.
From LightInTheBox, let’s move quickly to Minzhong, a relatively small food processor that listed its shares in Singapore in 2010. Minzhong’s shares lost half their value after short seller Glaucus Research issued a report questioning many of its financials, including an accusation that the company may have fabricated sales and payments to its largest supplier. (English article) I obviously have no idea if any of the allegations in the report are true, but clearly the claims spooked investors, which sparked the sell-off.
This kind of report was quite common at the height of the confidence crisis, and similar short seller research was what actually touched off the crisis in early 2011. Short sellers Muddy Waters and Citron were both major writers of such reports, attacking a wide range of companies that included big names like Focus Media (Nasdaq: FMCN), Pactera (Nasdaq: PACT) and Qihoo 360 (NYSE: QIHU). Most of the big names survived the attacks, though many smaller ones didn’t and were ultimately forced to de-list.
These latest allegations against Minzhong, combined with the sell-off for LightInTheBox shares, show that spring may have arrived for overseas listed Chinese shares, but that we’re still likely to feel an occasional winter chill as investor confidence slowly returns. Look for more similar volatility for the rest of this year, putting a damper on new IPOs until perhaps a longer term spring finally arrives in 2014.
Bottom line: A sell-off of LightInTheBox stock and short seller attack on a smaller Chinese firm show investors will remain cautious on many such firms for the rest of this year.