Even Alibaba is no open door for China tech listings
Daniel Stanton on the dangers for Asian IPOs.
Hong Kong bankers had been expecting the listing of ecommerce giant Alibaba to herald a wave of Chinese technology IPOs in the city. Now that Alibaba has opted for the US instead, that will not be happening, but any Chinese copycats risk making a short-sighted decision based on today’s red-hot market.
Ever since the days when people still updated their Myspace pages, Asian exchanges have been second-best to the US when it comes to internet-related stocks. There were hopes, however, that a US$15bn IPO from Alibaba would have had a magnetic effect in drawing tech-related stocks from China to the Hong Kong exchange. Specialist technology investors from overseas would have turned their attention to Hong Kong, analysts would have followed the stock, and conditions would have been perfect for smaller peers to follow and share the limelight.
Now, though, the status quo will face no such challenge. The US will continue to be the de facto listing destination for Asian tech stocks, with a few exceptions like Tencent, Boyaa Interactive and some smaller Chinese companies, who found it easier and more convenient to list in Hong Kong.
Still, launching a US IPO relies on being able to explain a company’s story to investors on the other side of the world. While they have a deep knowledge of bits and bytes, the challenge is understanding the old-fashioned part: where the money comes from. Chinese companies need to make few public filings in the mainland, and even some of those do not need to be particularly accurate, which has made it incredibly easy for cynical short-sellers to accuse certain issuers of fraud and reap the rewards when investors find they cannot disprove the allegations.
Mobile internet services company NQ Mobile was accused of fraud by the occasionally accurate Muddy Waters in October and its share price duly plummeted. Five months on, its share price has almost recovered, but the company may be wondering whether it would have been simpler to list in Hong Kong, where investors have a deeper understanding of Chinese companies, and have different disclosure expectations. Hong Kong may not require as many disclosures as the US, but it has taken a tough line on fraud, and now that new rules make IPO bookrunners criminally liable for false disclosures, it cannot be argued that its standards are looser.
Even without the attention of short-sellers, technology stocks are notoriously cyclical, and US investors have historically had a relationship with Chinese stocks that alternates between love and hate, with nothing in between. Tech is riding high right now, but when the bubble bursts, some Chinese issuers will surely find themselves lost in a foreign land, less appreciated than they might have been closer to home. Alibaba is big enough to be untouchable, but smaller stocks could suffer. One day you’re Facebook, the next day you’re Myspace.