China IPOs: Different this time

VC-backed online retailer LightInTheBox became only the third Chinese company to go public in the US in 18 months last week when it raised $79 million and saw its stock jump 22% on its NASDAQ debut.

The two companies that listed in 2011 - discount clothing website Vipshop and social networking platform YY - are also still trading substantially above their offering prices. Cinema equipment manufacturer GDC Technology will be hoping to continue the trend with its impending $75 million offering.

Hong Kong is still lagging - unless you are a large state-owned enterprise - and China has been closed for several months. Shanghai and Shenzhen won't stay inactive forever, with several industry participants expecting the IPO ban to be lifted within the next few weeks and listings to gather pace thereafter.

There are two major reasons why this time things will be different, and both are encouraging in terms of the long-term development of capital markets and Chinese corporations.

First, at least as far as the Chinese bourses are concerned, trading multiples are unlikely to reach the previous highs. Even if a PE investor achieves a public market liquidity event, it may not deliver the kind of returns that were projected when negotiating the original investment. For example, the average price-to-earnings ratio on ChiNext is about 42; two-and-a-half years ago it was 78.

Second, the markets will be much more selective than before. China's securities regulator is already doing its bit in this regard, conducting reviews of listing applicants in order to squeeze out companies of questionable quality. In late May, three brokerages were suspended from handling IPO business due to misdemeanors such as sponsoring the listings of companies that were found to have manipulated earnings.

It is also apparent in the kinds of Chinese companies that are managing to go public in the US. Given the crisis of investor confidence that came in response to a number of accounting scandals among US-listed Chinese companies, a degree of uneasiness is inevitable.

A prospective listing candidate must therefore appear whiter-than-white, or at least not a suspicious shade of gray. A business model based on the promise of as yet unrealized profits, or one lacking a value-added technology or a bricks-and-mortar element, is a harder sell.

GDC has been profitable for several years and it deals in digital servers for cinema screens - its goods can be seen in production and in action. LightInTheBox had to wait nearly two years to go public because investment banks were reluctant to pick up the mandate until it turned a profit, which happened in the final quarter of 2012. YY also posted operating losses until last year.

One other point of interest: LightInTheBox and GDC both appear to be playing down the fact they are Chinese. LightInTheBox's homepage is wholly in English apart from a link at the bottom for would-be suppliers, while PR executives have apparently been stressing that GDC is a Hong Kong company (true, but only to a point).

In each case, one can justifiably argue that these are international companies, following the path of numerous multinationals by manufacturing in China and selling overseas. LightInTheBox sources 70% of its products from factories in China but 80% of customers are in North America and Europe. GDC is responsible for around two thirds of digital cinema server installations in China but it also has a 34% share of the US market and is the dominant player in several other parts of Asia.

As long as facts are open to interpretation, marketers will take advantage. And putting distance between a firm and its Chinese credentials may help shift an offering in the US right now.

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• Topics
• Exits
• Greater China
• Exit
• China
• IPO