STOCKS: Weibo Drops on Outlook, as New IPO Stocks Tank

Bottom line: Big drops for three China concept stocks recently listed in New York, combined with a pullback for social networking giant Weibo, indicate a recent round of China stock euphoria may have crested.

Secoo continues to drop

Wednesday could go down as a watershed for newly listed China stocks in New York, which posted one of their worst days since a new wave of IPO euphoria began about a month ago. Three of the largest new offerings in New York, online microlender Qudian (NYSE: QD), e-commerce firm Secoo (Nasdaq: SECO) and education firm Rise (Nasdaq: REDU) all fell by 7 percent or more in the latest session.

At the same time, the more stately but still new-ish Weibo (Nasdaq: WB) also dropped by nearly 6 percent after the company announced plans for a $700 million convertible bond and gave some preliminary third-quarter results that clearly didn’t get people too excited. It’s hard to say if there was a single catalyst for this sell-off, which didn’t really go too far beyond these new listing candidates joined by Weibo.

But the pullback does seem to indicate a pause in the recent round of euphoria over US-listed China stocks and New York-listed China stocks in general. The big question, of course, is whether this pullback is just a hiccup or perhaps a sign of a rapid cooling in broader market sentiment. I suspect it could signal the start of a cooling period, since Weibo and bellwether Alibaba (NYSE: BABA) have posted huge gains this year that may be putting valuations just slightly ahead of where they should realistically be.

All that said, let’s start our roundup with the actual figures, beginning with the trio of newly listed candidates. The largest drop was notched by Rise Education, which fell by 14.4 percent. It was followed by 7.2 percent drops for both Qudian and Secoo, and the 5.5 percent drop for Weibo.

With those drops, Rise now trades at 16 percent below its IPO price, a sharp contrast with its gains of about the same amount in its trading debut last week. Secoo has become a bit of a basket case, with its latest drop valuing the stock at just over half of its IPO price. Qudian is the lone stock that still trades above its IPO price, though the shares have lost 20 percent of their value this week after their CEO made some unfortunate remarks, which I’ll describe shortly.

Weibo Wariness

Then there’s Weibo, whose shares have now pulled back about 15 percent over the last month and a half. Before that they had risen around 150 percent this year on a big of euphoria over the company’s newfound profits in live broadcasting services. In Weibo’s case, there are a couple of actual news items that could plausibly be linked to the latest drop, namely disclosure of its $700 million convertible bond program and some preliminary third-quarter results.

There’s nothing that unusual about the bond offer, as no conversion price is given and the amount isn’t too huge. Release of the preliminary results looks designed to offset any negative sentiment created by announcement of the bond program. The company said it earned about $320 million in revenue for the quarter, and about $100 million in profit. Both of those figures look pretty good compared to a year earlier, and don’t seem to signal a major slowdown in the company’s phenomenal recent growth.

As I’ve said at the outset, this particular pullback could well be some profit taking after a year of heady gains for many Chinese stocks, which has helped to fuel the current IPO wave we’re now seeing. Bellwether stock Alibaba is emblematic of the group, its stock now trading at double where it was at the very end of last year. That also includes a slight pullback of about 5 percent for the shares since the start of this month.

Qudian’s tumble is clearly tied to some remarks the company’s founder made earlier this week, specifically about the company’s bad loan ratio. Analysts apparently believe the ratio is highly understated, and the founder’s remarks on the subject in an interview, to the effect of “we don’t worry about that”, didn’t seem to shed any light on the situation.

But those concerns could weigh on the stock in the next few weeks and could potentially affect upcoming IPOs from other fintechs like Ppdai. At the end of the day, I’d say the latest wave of China euphoria has probably crested for now, and is likely to ebb from here on. Whether that’s a soft ebbing or hard one is harder to say, though I imagine we could see pullbacks in current valuations probably in the 10-20 percent range.

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