NY Loses IPO Luster As Cogobuy Eyes HK

An article today about the IPO plans of specialty e-commerce site Cogobuy caught my attention today, but not for the reasons you might think. At first, I almost ignored the report that quoted the chairman of this relatively small Shenzhen-based company talking about his plans for an IPO next year. (English article) But then I read through to the end of the article, where Cogobuy Chairman Kang Jingwei said he is planning to take his company public in Hong Kong.Such a move would mark a departure from making an IPO in New York, which has been the location of choice for Chinese Internet and other high-tech firms until recently. Kang’s IPO plans could well mark the beginning of a new trend that sees Chinese companies from the high-tech and other emerging fields eschew New York offerings for Hong Kong and possibly even China, where the Nasdaq-style ChiNext board in Shenzhen has been heavily courting listings from Chinese high-growth start-ups.

Cogobuy’s comments come against a backdrop of a deep freeze for Chinese tech shares in the US, and a growing wave of de-listings by Chinese firms from the New York and Nasdaq stock exchanges. The comments also come as both Hong Kong and the Nasdaq are heavily courting e-commerce leader Alibaba, which is preparing to make a blockbuster multibillion-dollar IPO as soon as this year. Alibaba previously flirted with the stock markets when it listed its B2B e-commerce unit Alibaba.com in Hong Kong in 2007, only to privatize the unit last year after its stock languished amid slowing growth.

Let’s look quickly at the reports on Cogobuy, which specializes in sales of integrated circuits (ICs) used in computing devices. The report I saw details the company’s recent sales trends, but the most interesting part for purposes of this commentary are Kang’s comments that his company has always been profitable.

That’s a key element for listings in Hong Kong, which requires that companies be profitable for 3 years before they can list on its main board. Companies that don’t meet that requirement can still list on Hong Kong’s smaller enterprise-style board where trading is much lighter, and then later transfer to the main board when they meet the profit requirement.

Regardless of the path, Hong Kong could well become the preferred place for Chinese firms to list as the US rapidly loses its attraction. US investors have largely given shares of Chinese firms the cold shoulder for the last 2 years, following a series of scandals that highlighted lax accounting standards practiced by many smaller firms.

Money-losing companies have been hit especially hard, which includes many of the most recently listed Internet firms like online video site Youku Tudou (NYSE: YOKU) and social networking site Renren (NYSE: RENN). The investor cold shoulder, combined with heavy scrutiny by the US securities regulator, has led to a steady stream of privatizations by US-listed Chinese firms, with Simcere Pharmaceutical (NYSE: SCR) and Camelot Information Systems (NYSE: CIS) becoming the latest to announce such plans earlier this month. (previous post)

By comparison, Hong Kong is considered a more benign place to list for Chinese companies, though the market isn’t known for its abundance of high-tech listings. The one big exception to that is Tencent (HKEx: 700), China’s biggest Internet firm, whose shares have performed spectacularly since their 2004 debut in Hong Kong. While Cogobuy is just a single company and certainly we’ll need to see where other tech firms choose to list, the emergence of Hong Kong as a new center for Chinese high-tech IPOs certainly seems like a strong possibility. Accordingly, I would be surprised to see even Alibaba choose the city over New York for its highly anticipated IPO either this year or next.

Bottom line: Cogobuy’s plans for an IPO in Hong Kong reflects a growing move by Chinese tech firms away from US listings due to a chilly climate and more regulatory scrutiny over the last 2 years.

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This article was first published in the online edition of the South China Morning Post at www.scmp.com.

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