US investors seem to have an insatiable appetite for new Chinese tech stocks, and some analysts wonder if the great tech bubble of the late 1990s is repeating itself. Online video company Youku.com Inc, sometimes referred to as the YouTube of China, sold shares in its IPO on Tuesday, and rose 161 percent on its first day of trading, locking in the best first day returns of an IPO in five years.
Youku's revenue was up 135 percent in the first nine months of 2010 compared with a year earlier. But one thing the company does not have is profit: its net loss widened by 22.5 percent to 167 million yuan ($25.1 million) in the same period. The US has seen this before, and it did not end well. In the late 1990s, companies with little more than a business plan were able to raise millions of dollars in initial public offerings. But in March 2000, the market started to deflate, and the Nasdaq Composite, where many tech stocks were listed, is still well below its prior peak.
Come January, the Nasdaq will have 11 employees combing China looking for new businesses to list, said Bob McCooey, head of listings for the exchange. That compares to two in the United States, he added. "Outside of the United States it's China that is driving the IPO market," said McCooey, who also had his business cards printed in both English and Mandarin.
McCooey said when he took over as head of listings, one of the first things he did was order more lapel pins with a crossed American and Chinese flag, because he realised China was increasingly a source of US listings. China's Internet sector is red hot because it is difficult for outside competitors to overcome the political and cultural barriers to operate in the nation. The number of potential customers is massive in a country with a population of more than 1.3 billion.
With interest rates in the United States likely to stay low for some time, and economic growth expected to be tepid at best, investors are seeking higher returns in fast-growing economies. But there are serious questions about how some of the Chinese companies that are going public now will make money.
EVERYONE'S BUYING For now, investors are keen for these stocks. Online retailer E-Commerce China Dangdang, marketed as the Amazon.com Inc of China, had more than 500 different buyers in its IPO, a source familiar with the situation told Reuters.
An IPO of that size - $272 million - listing in the United States would typically have only 50 or 100 buyers, the source said. "It's everyone. Everyone bought Dangdang," the source said. Dangdang's buyers included funds in the Middle East, Asia and Europe, according to the source. Stock in the company, which went public on the same day as Youku, soared 87 percent in its first day of trading.
Other Chinese companies are also lining up to cash in. Tudou Holdings Ltd, another Chinese web TV service, has filed with US regulators to raise up to $100 million. It will likely debut in the first quarter of 2011, a source said. Social networking companies are likely the next wave of Chinese Internet companies to seek US listings.
Oak Pacific Interactive, owner of China's largest social networking site Renren, has tapped Credit Suisse AG and Deutsche Bank AG for its US IPO in the first half of next year, sources told Reuters. TaoMee, a Chinese kids social networking site will conduct its "beauty parade" for investment bankers in the first quarter of 2011, while Kaixin001, another Facebook clone, is seeking a 2011 listing but has not tapped bankers, a source familiar with the situation said.
Taobao, a unit of China's largest e-commerce firm Alibaba Group and the nation's most popular consumer-oriented online e-commerce website has had informal talks with banks about a possible IPO, two sources familiar with the situation said. "Everybody sees that this model can work," that source said. "Everyone is accelerating their schedule. They don't want to miss this window."
TROUBLE IN THE MIDDLE KINGDOM Youku's debut show that investors are willing to put profitability on hold - but at some point the companies will need to perform. "Investors are buying the runway, buying what the company has predicted for 2012, 2013, rather than what has been delivered so far," McCooey said of the recent debuts. It's up to the companies to deliver profits, he added. "We're not kingmakers," he said. It hasn't always been this way with Chinese tech companies. China web search engine Baidu rose 354 percent in its 2005 debut but it was also profitable the day it went public.
There are also signs investors can become disenchanted in these IPOs. For example, China-based online retailer Mecox Lane Ltd went public in October and its shares rose 56.9 percent. But after Mecox posted quarterly results, its shares plummeted, and now trade 37.7 percent below their initial offer price. The company is being sued by its investors. "Execution for these companies, particularly those that have seen high first day increases, is going to be really important. A lack of execution is going to put a damper on other opportunities," said Scott Cutler, head of listings at NYSE Euronext.
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