Q4 NY IPO Burst Nears, As Market Clean-Up Wraps

58.com among field of Q4 listing candidates

I want to use one of my final posts for September to take a look at the IPO outlook for Q4, specifically what we might expect to see for new Chinese offerings in New York in the final 3 months of 2013. When the history books are written, this year will probably go down as one of the weakest in recent memory for New York IPOs by major Chinese firms. But that said, I do still expect to see a small flurry of activity in the fourth quarter, based on recent reports of new listing plans and signs that a 2-year-old purge of dubious Chinese firms from US stock markets may be finally wrapping up.

The first 3 quarters of 2013 have been a difficult time for Chinese firms looking to list on Wall Street, with the only successful major offering coming from e-commerce firm LightInTheBox (NYSE: LITB) in June. LightInTheBox share initially soared after the IPO, but then tumbled over the last month as its business prospects faded.

I attributed the company’s suddenly diminished outlook to financial games it probably played in the run-up to its IPO to make itself look more attractive to investors. But I added my view that the company is probably still a good long-term bet. LightInTheBox American Depositary Shares (ADS) are now down more than 40 percent from their highs in August. Still, the stock is still more than 30 percent higher than its IPO price of $9.50.

The rocky road for Chinese stocks in New York stems from a confidence crisis that began more than 2 years ago, when short sellers launched a series of attacks that revealed questionable accounting at some of these firms. The US Securities and Exchange Commission (SEC), the securities regulator, aggressively pursued many of these smaller, questionable companies over the last 2 years, seeking to clean up the market. In the latest development on that front, the SEC has accused a top executive at ChinaCast Education (OTC: CAST) of fraud and insider trading, in what looks like the first step to the company’s eventual forced de-listing. (Chinese article)

I won’t waste too much effort writing about this company, since its market value is tiny at just $5 million, and it now trades at just 10 cents per share. But it’s worth noting that ChinaCast was once worth 80 times more at the height of its value, and had a market value of around $300 million as recently as last year. These new accusations don’t surprise me at all, as many top executives at smaller Chinese firms often treat the companies as their personal kingdoms, and use them to play financial games. The sooner this clean-up is finished, the better it will be for the entire sector.

That said, we can probably expect to see at least 2 relatively large IPOs by Chinese firms before year-end, and quite possibly a few more if conditions remain favorable. Online classified ads specialist 58.com and lottery website 500.com are both reportedly pursuing New York IPOs by year end, aiming to raise up to $100 million and $150 million, respectively. (previous post) Online travel site Qunar is also reportedly looking to raise up to $150 million in a New York IPO as the fourth quarter. (previous post) And finally there’s e-commerce leader Alibaba, which is threatening to hold its multibillion-dollar IPO in New York if it fails to get a rule exception it is seeking from Hong Kong securities regulators. (previous post)

I suspect there are probably 2 or 3 other firms that are quietly preparing for possible fourth-quarter IPOs, but which have escaped media attention so far. Any applicants will need to be profitable to launch a successful offering, and most are likely to come from the Internet or other tech areas. When all is said and done, look for 3-5 such offerings by year end, which should price and perform moderately well after their trading debuts.

Bottom line: We should see 3-5 New York IPOs by Chinese firms by year end, which should price and perform moderately well in their trading debuts.

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