Chinese IPOs in the US: Green shoots

Chinese consumer have barely heard of LightInTheBox, a Beijing-based online clothing retailer that sources goods domestically and mainly sells them to buyers overseas. But if the six-year old company follows through on plans announced last week to raise up to $86 million through an IPO on the New York Stock Exchange (NYSE), it will provide a much-needed shot in the arm for China VC investors. 

After 15 listings in 2011, only two Chinese companies have managed to go public in the US since the start of 2012 - discount clothing website Vipshop and social networking platform YY. While LightInTheBox's IPO is expected to be successful, it has been two years in the making, an indication that investor sentiment toward Chinese companies is still relatively weak.

"Investment banks in the US have been fielding proposals from LightInTheBox for over a year, but they were reluctant to meet investors until the company posted a profit in the fourth quarter last year," an early-stage technology VC manager tells AVCJ.

Most Chinese technology firms prefer to list in the US because, unlike the Hong Kong and mainland China bourses, there is no requirement for three consecutive years of profitability. Moreover, NASDAQ is still perceived by many as being a good venue for technology, thanks to its sophisticated institutional investors and strong analyst coverage.

"However, it is also true that there is a general perception that the multiples of Chinese companies listed on US exchanges are not as high as tend to be afforded on the other exchanges," says Carmen Chang, newly appointed partner and Asia managing director at New Enterprise Associates (NEA). "Negative publicity of possible accounting fraud by some Chinese companies has also been harmful."

Turning the corner

Although leading Chinese tech stocks have recovered from the hit that came in 2011 when a number of companies that went public in the US through reverse mergers - which are quicker, cheaper and involve less oversight than full IPOs - the specter remains. Several listings have been abandoned due to weak demand. Will the mood change with LightInTheBox?

"There have been some positive signs in the US market towards Chinese technology sector recently. Companies that listed last two years ago - including Qihoo 360, Youku, YY and Vipshop - have seen their share prices increase post-IPO," says Chuan Thor, managing director at Highland Capital Partners, which invested in software provider Qihoo 360.

"There is a distorted message in the market the all Chinese firms are poisonous, but it mainly concerns reverse merger firms, not quality technology businesses. If a company is showing strong growth momentum and profitability, it is a right time to go."

Vipshop didn't have an auspicious start, its stock sinking 15% on its trading debt despite VC backers DCM and Sequoia Capital agreeing to buy an additional $20 million worth of shares in the offering. Now, though, Vipshop is trading at $28, up more than fourfold on its IPO price of $6.50, with a market capitalization of $1.5 billion.

YY, though profitable on IPO, had to price its shares at the bottom end of the indicative range and sources familiar with the situation tell AVCJ that associates of those involved covered a large portion of the offering. If so, their faith in the company was well placed. YY's stock has jumped 80% since its debut.

Richard Liu, a partner at Morningside Technologies, which has backed YY since inception, isn't convinced that the market will turn a corner with LightInTheBox.

"There might be more Chinese e-commerce firms looking for an IPO in the US this year, but I'm not over optimistic that the market sentiment has recovered to 2011 levels," he says. "Given that LightInTheBox's capital-raising target is quite small, it is hard to take it as an indicator that investor appetite is coming back - there need to be some landmark deals for this to happen."

A global VC manager also notes that US institutional investors usually only attach themselves to firms with a market capitalization in excess of $1 billion during the pre-subscription period. LightInTheBox is below that level.
It is telling that the banks were only willing to touch LightInTheBox after it reached profitability. Companies looking to follow its path to a US bourse need to offer a similar kind of certainty. This could be difficult for e-commerce where stiff competition, and the need to effectively buy market share in a climate of minimal customer loyalty, has driven many players into the red.

"Profitability or the visibility to profitability is very important if the firm wants to pursuit an IPO," says Ian Goh, a partner at Matrix Partners China.

As for potential landmark listings that might instill confidence in the market, it is rumored that Alibaba Group will go public in the US by the end of this year. A handful of the larger Chinese e-commerce firms - those perceived as having sufficient scale to survive - are also expected to list, notably 360Buy and Vancl, China's leading B2C direct sales e-commerce company and its largest online clothing retailer, respectively. China Auto Rental, which sold a $200 million equity stake to Warburg Pincus last year after plans to list on NASDAQ went awry, might also return to the market.

For some of these companies, an IPO can't come soon enough. E-commerce players have a notoriously high capital burn rate, with 360Buy receiving $400 million from Tiger Global and Ontario Teachers' Pension Plan in November 2012 and then another $400 million from a consortium led by Saudi Arabia's Kingdom Holding barely three months later.

LightInTheBox is a slightly different creature and Ron Cao, managing director of Lightspeed China Partners, says this could work in the firm's favor - providing it's not too greedy on pricing.

"LightIntheBox is a growth-driven firm where Americans might know its name as the customers are mostly overseas. The story of US-China cross-border commerce can be appealing," says Cao. "But you can't price too high. You should ensure everybody has up-side potential through an IPO, including the subscribers."

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• Topics
• Greater China
• North America
• Exits
• Technology
• Consumer
• Venture
• IPO
• Exit
• USA
• China
• Venture
• New Enterprise Associates
• Highland Capital Management
• e-commerce