The official start of winter may fast be approaching, but there are growing signs that an early spring has arrived for US-listed China stocks, with Internet security provider NQ Mobile (NYSE: NQ) and e-commerce firm Vipshop (NYSE: VIPS) making headlines that look good for both themselves and the broader sector. NQ, which was formerly called NetQin Mobile, has proven once more that short sellers no longer hold the same kind of influence over these stocks the way they did just 6 months ago, with its shares bouncing back strongly after a recent attack. Meantime, Vipshop, one of only 2 major Chinese firms to list in the US this year, has suddenly become a darling of investors, who have sent its shares to new highs as they scramble to buy a piece of what has quickly suddenly China’s largest listed e-commerce company.
These 2 pieces of news are just the latest signs that a nearly 2 year downturn for US-listed Chinese stocks may finally be receding, which could pave the way for a flood of new listings next year as market sentiment improves. Confidence in the sector was badly damaged by a series of accounting scandals at several firms starting in spring of 2011.
But an aggressive clean up by the US securities regulator, combined with a bruising series of short-seller attacks, have cleaned a lot of the dead wood from the market. That means investors believe that many remaining companies are healthy and their financial reports are accurate.
Let’s look at the latest news, starting with NQ. The company came under a attack a week ago from a short seller who speculated that some of its market share data might be inflated. NQ’s shares dropped 11 percent after the report came out, certainly not an encouraging sign but also far less than some of the drops seen after other attacks during the confidence crisis.
NQ responded a day later with the usual denial, which simply accused the attacker of misunderstanding its business model and making flawed conclusions as a result. (company statement) In my view the statement didn’t look very different from all the other denial statements that came out during the crisis and usually failed to halt the sell-offs.
But in this case, investors seem to have quickly accepted that the attack was unwarranted, and NQ’s shares have been steadily bouncing back since the initial drop. They closed up slightly in Monday trade, and are now just 2 percent below where they were before the short seller attack.
Meantime, shares of Vipshop continue to soar after the company passed the struggling Dangdang (NYSE: DANG) in October to become China’s most valuable publicly listed e-commerce company. (previous post) The company’s shares have tripled from their low in late August, taking its market capitalization to $730 million — double the size of Dangdang.
Unlike Dangdang, which has posted massive losses in recent quarters due to stiff competition among general merchandise e-commerce firms, Vipshop focuses on the lower-end bargain segment of the sector and is on track to become profitable in the next quarter or 2. Look for more positive movements from other similar healthier US-listed Chinese firms in the next couple of months, especially ones with strong revenue growth good profit potential, as investors continue to return to the sector.
Bottom line: NQ’s survival of a short seller attack and the continued rise of Vipshop are the latest signs that US investors are returning to China stocks, which could rally over the next 2 months.
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