The two-day rally in YY Inc. (YY), the first Chinese company to debut shares in the U.S. since April, is signaling the revival of a market that is suffering the biggest dearth of initial public offerings since 2003.
YY, a Guangzhou-based company that runs an online social network, has jumped 7.8 percent to $11.32 since Nov. 21, when it became the third Chinese company to list stock in the U.S. this year. The IPO priced at the bottom end of YY’s $10.50 to $12.50 target range, and raised $82 million for the company. The Bloomberg China-US Equity Index (CH55BN) of the most-traded Chinese stocks in the U.S. had its first five-day advance in three weeks, gaining 4.5 percent to the highest since Nov. 7.
Chinese IPOs in the U.S. have declined to three this year from a peak of 42 in 2010 as the slowing economy and allegations by short sellers such as Muddy Waters LLC of accounting irregularities sapped investor demand. Acquity Group Ltd. (AQ) and Vipshop Holdings Ltd. (VIPS), the two other Chinese companies that listed in the U.S. this year, have surged at least 12 percent since their IPOs after cutting their targest prices by about 40 percent amid weaker demand.
“YY’s had a good trading debut,” Josef Schuster, founder of the Chicago-based Ipox Schuster LLC that oversees about $2 billion, said in a phone interview on Nov 21. “It’s really going to pave the way for other similar IPOs.”
TCP International Holdings Ltd. (0214216D), a Shanghai-based manufacture of light bulbs, Newsummit Biopharma Holdings Ltd (NSB), a Shanghai drug company, and China Dredging Group Ltd., which provides dredging services in Fuzhou, Fujian Province, are among companies that have announced U.S. IPO plans over the past 12 months. China Auto Rental Holdings Inc. (CARH), the country’s largest car-rental provider, postponed a plan to raise as much as $138 million in April after struggling to attract investors.
YY’s experience may spur other Chinese companies to move forward with postponed or pending listings in the U.S., according to Ipox Schuster, Oberweis Asset Management Inc. and Paragon Capital.
“Strong Chinese companies still want access to the U.S. market, which is the deepest, most prestigious capital market,” Kevin Pollack, a managing director at Paragon Capital, which invests in Chinese stocks, said by phone on Nov. 21 from New York. “A long line of companies want to do IPOs here. Having one successful IPO bodes well for the other companies.”
Hollysys Automation Technologies Ltd. (HOLI), led the rally in Chinese companies listed in the U.S. last week, as data showing manufacturing is expanding signaled growth in the world’s second largest economy may be picking up.
Hollysys, a Beijing-based manufacturer of automation and control systems, soared 16 percent last week to $10.55, while China Eastern Airlines Corp. (CEA) rose 5.6 percent to $17.94. The air carrier’s shares traded 2.6 percent higher than their equivalent in Hong Kong, the biggest premium since September, data compiled by Bloomberg show.
The iShares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., jumped 2.4 percent to $37.46 on Nov. 23, the highest close since Nov. 6. The ETF gained 4.7 percent last week, the most since June.
Vipshop, an online discount retailer based in Guangzhou, raised $72 million by selling 11 million ADRs at $6.50 each in March, below their target range of $8.50 to $10.50 per share. Acquity, a Hong Kong-based online advertising company, raised $33 million in April, compared with its minimum target of $56 million.
Vipshop slumped 15 percent in the first day of trading while Acquity lost 4.2 percent. Both have since rebounded, with Vipshop up 90 percent since its IPO and Acquity gaining 12 percent since its U.S. listing.
The three companies are bucking a trend that has seen Chinese companies withdraw from the exchanges in North America as valuations slumped amid campaigns by short sellers. Since April 2010, 49 companies -- including Focus Media Holdings Ltd. and 7 Days Group Holdings Ltd. (SVN) -- have announced their intention to go private and delist from U.S. markets, according to a report by Roth Capital Partners issued Nov. 5.
Meanwhile, the number of IPOs has dropped to three from 17 in 2011, data compiled by Bloomberg show. The Bloomberg China-US gauge has lost 14 percent over the past two years, compared with an advance of 19 percent in the Standard & Poor’s 500 Index.
While initially worried that YY wouldn’t meet its fundraising target, Chief Financial Officer Eric He said the stock’s climb shows Chinese companies with strong growth and earnings remain attractive to U.S. investors.
“In the U.S. market, good companies will ultimately be able to show their true value,” He said in a phone interview on Nov. 21. “In a difficult market situation where many people are looking with magnifying glasses, we are willing to come and accept the strictest examination by the market.”
YY, which provides online music, games and networks, counted Tiger Global Management LLC. and Steamboat Ventures, a venture capital backed by Walt Disney Co., as investors. Morgan Stanley & Co., Deutsche Bank AG and Citigroup Inc. were among the IPO underwriters, according to a company filing.
While YY is gaining, investors remain wary of Chinese companies after allegations against companies including Sino- Forest Corp. and Focus Media that they misled investors or misrepresented assets, according to Francis Gaskins, president of Marina Del Rey, California-based Ipodesktop.com.
“They have good financials and it happens to be in a hot sector, Gaskins, whose firm monitors initial public offerings, said on Nov. 21. ‘‘But I don’t see the start of a flood of IPOs of Chinese companies.’’
‘Appealing to Investors’
At $10.50 a share, YY was priced at nine times its earnings in the first nine months at the IPO. By that measure, it was cheaper than some of the largest Chinese Internet companies. Tencent Holdings Ltd. (700), China’s biggest Internet company, trades for 32 times trailing 12-month earnings. The price to earnings ratio was 22 for Baidu Inc., the largest online search engine.
‘‘The prices are discounted enough to attract investors,’’ Jeff Papp, a senior analyst at Oberweis Asset Management, which invests in Chinese companies, said by phone from Lisle, Illinois on Nov. 21. ‘‘Both the company and the banks have understood that, given the sentiment, it needs to be done in a fashion that the prices have to be appealing to investors. Some profitable trading may help open up the backlogs in the IPO market.’’
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