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Hong Kong Lures New York IPOs After China Auditors Ban

Photographer: Jerome Favre/Bloomberg

Stock traders sit at their desks facing an electronic board on the trading floor of the Hong Kong Stock Exchange in Hong Kong. Alibaba Group Holding Ltd., China’s largest e-commerce company, said in November that it’s deciding whether to sell shares in the U.S. or Hong Kong. Close

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Photographer: Jerome Favre/Bloomberg

Stock traders sit at their desks facing an electronic board on the trading floor of the Hong Kong Stock Exchange in Hong Kong. Alibaba Group Holding Ltd., China’s largest e-commerce company, said in November that it’s deciding whether to sell shares in the U.S. or Hong Kong.

The U.S. ban on Chinese affiliates of the four biggest accounting firms stands to undermine a pickup in initial share sales by Chinese companies in New York.

While the auditors said they’ll appeal the six-month ban imposed by a U.S. judge, the ruling will probably push Chinese companies to opt for a listing in Hong Kong instead of New York, said Bruno del Ama, chief executive officer of Global X Funds.

Chinese companies had begun lining up to sell in New York this year after eight initial public offerings were carried out in 2013, up from three the year before. Beijing Jingdong Trading Co. and Zhaopin Ltd. wanted to go public in the world’s biggest stock market, people familiar with the matter said this month. Alibaba Group Holding Ltd., China’s largest e-commerce company, said in November that it’s deciding whether to sell shares in the U.S. or Hong Kong.

“Some of the sexiness of IPOs in the U.S. may be going away because of some of the perception issues,” del Alma, who helps manage $2.8 billion in exchange-traded funds, said in an interview at Bloomberg’s headquarters in New York Jan. 24. “When you think about it, five years ago technology companies were looking at an IPO in Nasdaq because that’s the global technology exchange. Then all of sudden these accounting issues started to come up.”

The Bloomberg China-US Equity Index of the most-traded Chinese stocks in New York dropped 4.3 percent last week, the biggest slump in three months, after the U.S. Securities & Exchange Commission barred the four largest accounting firms from conducting audits of New York-listed companies. The Hang Seng China Enterprises Index of mainland Chinese stocks listed in Hong Kong sank 2.6 percent by 10:24 a.m. local time today.

Lower Valuations

The decision to ban the affiliates of the largest accounting firms for six months “ignored” China’s efforts and progress made on cross-border rules cooperation, the nation’s securities regulator said on Jan. 24 on its microblog. Deloitte Touche Tohmatsu CPA Ltd., PricewaterhouseCoopers Zhong Tian CPAs Ltd., Ernst & Young Hua Ming LLP and KPMG Huazhen have 21 days to file a so-called petition for review with the SEC before the Jan. 22 ruling would become final.

The SEC ruling could also mean lower valuations for the IPOs, said Bao Fan, chief executive officer of technology-focused boutique investment bank China Renaissance.

“The one thing investors dislike most is uncertainty and that uncertainty will be priced in,” Bao said in an interview. “It is the companies, the issuers, that are going to pay the price.”

China Renaissance advised Qunar Cayman Islands Ltd. (QUNR) and Sungy Mobile Ltd. on their U.S. initial share sales last year.

Caught in ‘Crossfire’

Underscoring investor skittishness, all but one of the Chinese companies that listed in the U.S. in 2013 fell Jan. 23. Sungy Mobile Ltd., which runs a Chinese mobile web portal, tumbled 9.7 percent, while online sports-lottery operator 500.com Ltd. dropped 10 percent.

The firms receiving the bans said in an e-mailed statement Jan. 22 that they will appeal the decision by U.S. Administrative Law Judge Cameron Elliot.

“The companies are getting caught in the crossfire of the SEC and the Chinese government,” Jay Ritter, a finance professor at the University of Florida at Gainesville, who studies IPOs, said by phone. “The most appealing option for the handful of Chinese companies that were planning on listing in the U.S. in the next six months will be to postpone until the ban ends.”

Elliott ordered the ban after the accounting firms’ Chinese units failed to comply with SEC orders for documents needed for a series of accounting fraud probes.

Muddy Waters

IPOs by Chinese companies started gathering pace in mid-2013 after a two-year lull sparked by accounting frauds at Sino-Forest Corp., a Chinese plantation company listed in Canada that was accused by short-selling firm Muddy Waters LLC in 2011 of overstating its timber holdings.

Muddy Waters said NQ Mobile Inc., a Chinese mobile-security service provider, inflated sales in a October report. Beijing-based NQ Mobile has denied the allegations and set up an independent committee to review the report.

Optimism about surging e-commerce in the world’s most populous nation helped reignite investor interest in Chinese IPOs. Even after last week’s decline, the Chinese companies that went public in the U.S. last year have almost doubled from their offer prices on average, data compiled by Bloomberg show.

Alibaba Offering

Alibaba, based in Hangzhou, hasn’t decided when and where to sell shares, an external spokesman for the company said by phone Nov. 20 after a Nikkei newspaper report cited the company’s founder Jack Ma as saying he preferred having an initial public offering in Hong Kong as early as this year.

The value of such deals is poised to jump again this year, as online retailer Jingdong plans to raise about $2 billion, people with knowledge of the matter said. Zhaopin is preparing an IPO of roughly $200 million as early as in the first half, people familiar with that deal said.

Four Chinese companies currently have documents on file to go public in the U.S., according to data compiled by Bloomberg. They are Anpulo Food Inc., WINHA International Group Ltd., Pacificorp International Hotel Management Inc. and Vesta International Corp., the data shows.

To contact the reporters on this story: Jonathan Browning in Hong Kong at jbrowning9@bloomberg.net; Belinda Cao in New York at lcao4@bloomberg.net; Fox Hu in Hong Kong at fhu7@bloomberg.net

To contact the editors responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net; Tal Barak Harif at tbarak@bloomberg.net

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