15th November 2011
FROM THE DESK OF THE CHAIRMAN
The ability to differentiate between the really strong companies and those just riding the wave in the China Markets is crucial, as illustrated in a report titled “What’s Wrong With Chinese IPOs?” Last year, the debuts of companies like E-Commerce China Dangdang and Youku . com on U.S. exchanges were a signal of how hot the market for Chinese stocks has become.
The IPO research found that an investor who bought all 68 U.S.-listed China initial public offerings from 2008 through mid-June would have seen an average loss of 24%, compared with an average return of 25% on non-Chinese IPOs. The lesson – and an apt one as social media companies like LinkedIn and Groupon come to market – is that buying on a theme like China’s rapid economic growth, without delving into the nitty-gritty of the particular business, is a dangerous game.
The report also highlights recent fraud investigations of Chinese companies like Longtop Financial, which has certainly given the market a black eye. It isn't just inexperienced investors who have gotten lured into the maze either. Billionaire John Paulson’s hedge fund recently disclosed it had exited its position in Sino Forest – with a loss of some $750 million – after that company became embroiled in fraud allegations.
Part of the reason many of these companies are under the microscope is that any sizzling market will attract bad actors, but it is also a reflection of the changing nature of the types of Chinese companies listing in the U.S. Once the domain of old-school manufacturing operations and state privatizations like China Telecom and PetroChina, the U.S. market for Chinese companies is now a home for online businesses like Baidu or companies tied into the evolution of the country’s consumers like Ctrip.com and hotel chain Home Inns. (See “In New Crop Of Chinese IPOs Is There Another Baidu?” and “YouTube, Amazon Of China Make Big Debut In New York.”)
At the same time, the maturation of Hong Kong’s stock exchange has served two purposes “It showed…that the PRC did not need the U.S. capital markets to raise vast amounts of money and it provided a convenient way for the government to dispose of privatizations in which U.S. investors had limited interest.” Slower-growing businesses have listed in Hong Kong, while growth companies head for U.S. markets.
The confluence of factors – an appetite for fast-growing businesses in the U.S. and a desire by Chinese companies to raise boatloads of capital – has been the force behind some of the murkiness in the U.S. market, as sloppy financial reporting proliferates. “A number of Chinese companies had only recently hired a CFO and supporting staff,”
Long-term, Chinese companies have a valuable place in the U.S. equity markets, but must meet certain standards. It’s hard to argue with the stance that “investors are entirely legitimate in demanding full disclosure, candor and confidence that information will be disclosed in a timely and appropriate manner.”
Highlighting the challenges in the market is not an indictment of all Chinese companies listed in the U.S., we make clear. In fact, some understand the concepts well, particularly not making unreasonable assumptions about growth to juice valuations and providing clear financial statements audited by a major financial firm.
Unfortunately, until the number of Chinese companies with questionable reporting become exceedingly rare, the bad will continue to mar the reputation of many of the good.
Kind regards
Colin Archer
Chairman
APEC International Investment Group Limited
5th Floor EDGECLIFF CENTRE
203-233 New South Head Road SYDNEY AUSTRALIA
Australian telephone: 0403 951 981
international telephone: + 614 03 951 981
email: colinarcher@apecgroup.org
web: www.apecgroup.org
skype: apec.group
FROM THE DESK OF THE CHAIRMAN
The IPO research found that an investor who bought all 68 U.S.-listed China initial public offerings from 2008 through mid-June would have seen an average loss of 24%, compared with an average return of 25% on non-Chinese IPOs. The lesson – and an apt one as social media companies like LinkedIn and Groupon come to market – is that buying on a theme like China’s rapid economic growth, without delving into the nitty-gritty of the particular business, is a dangerous game.
The report also highlights recent fraud investigations of Chinese companies like Longtop Financial, which has certainly given the market a black eye. It isn't just inexperienced investors who have gotten lured into the maze either. Billionaire John Paulson’s hedge fund recently disclosed it had exited its position in Sino Forest – with a loss of some $750 million – after that company became embroiled in fraud allegations.
Part of the reason many of these companies are under the microscope is that any sizzling market will attract bad actors, but it is also a reflection of the changing nature of the types of Chinese companies listing in the U.S. Once the domain of old-school manufacturing operations and state privatizations like China Telecom and PetroChina, the U.S. market for Chinese companies is now a home for online businesses like Baidu or companies tied into the evolution of the country’s consumers like Ctrip.com and hotel chain Home Inns. (See “In New Crop Of Chinese IPOs Is There Another Baidu?” and “YouTube, Amazon Of China Make Big Debut In New York.”)
At the same time, the maturation of Hong Kong’s stock exchange has served two purposes “It showed…that the PRC did not need the U.S. capital markets to raise vast amounts of money and it provided a convenient way for the government to dispose of privatizations in which U.S. investors had limited interest.” Slower-growing businesses have listed in Hong Kong, while growth companies head for U.S. markets.
The confluence of factors – an appetite for fast-growing businesses in the U.S. and a desire by Chinese companies to raise boatloads of capital – has been the force behind some of the murkiness in the U.S. market, as sloppy financial reporting proliferates. “A number of Chinese companies had only recently hired a CFO and supporting staff,”
Long-term, Chinese companies have a valuable place in the U.S. equity markets, but must meet certain standards. It’s hard to argue with the stance that “investors are entirely legitimate in demanding full disclosure, candor and confidence that information will be disclosed in a timely and appropriate manner.”
Highlighting the challenges in the market is not an indictment of all Chinese companies listed in the U.S., we make clear. In fact, some understand the concepts well, particularly not making unreasonable assumptions about growth to juice valuations and providing clear financial statements audited by a major financial firm.
Unfortunately, until the number of Chinese companies with questionable reporting become exceedingly rare, the bad will continue to mar the reputation of many of the good.
Kind regards
Colin Archer
Chairman
APEC International Investment Group Limited
5th Floor EDGECLIFF CENTRE
203-233 New South Head Road SYDNEY AUSTRALIA
Australian telephone: 0403 951 981
international telephone: + 614 03 951 981
email: colinarcher@apecgroup.org
web: www.apecgroup.org
skype: apec.group
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