New Rules In China's IPO Game

Now investors have the information to sort the darlings from the dogs

Time was when China-related stocks pretty much rose and fell together. When China fever raged, all corporate boats, however leaky, would rise on the tide of money pouring in. Then when investors got skittish, the swirling investment seas sank every stock. But today, trading in China companies listed outside the mainland is more nuanced, thanks to greater transparency. That means investors finally have the information they need to sort out the darlings from the dogs. "We can meet management and have two-way communication now," which makes stock-picking easier, says Daniel Chui, head of investor communications at JF Asset Management in Hong Kong.

This new discriminating attitude has shown up in the stock prices of two recent initial public offerings. Ever since online games company Shanda Networking Development Co. (SNDA ) made its debut on the NASDAQ in May, raising $152 million, it has shrugged off the slowdown in China's overheated economy. Fact is, the boom in online gaming has barely been affected by the economic pullback. On Oct. 27, Shanda shares closed at $28.93, 163% above their $11 listing price.

In contrast, investors who piled into short-messaging service (SMS) provider Linktone Ltd. (LTON ) when it floated its stock back in March are singing the blues. The company is trading 43% below its listing price of $14. Linktone is one of many companies, including NASDAQ-listed Inc. (NTES ) and Inc. (SOHU ), that have been hurt by a recent crackdown by Beijing on SMS content.

At the same time, new IPOs that would have been a slam dunk a year ago are finding investors to be increasingly picky. In late September, Carollton (Tex.)-based phone distributor CellStar Corp. (CLST ) shelved plans for an IPO in Hong Kong of its China operations, explaining that weakness in the wireless sector made its offering inadvisable. But two days later, recruitment Web site 51job Inc. (JOBS ) raised $73.5 million on the NASDAQ without breaking a sweat. That's because of huge demand for job-search services in China's rapidly evolving labor market.


China investors are also playing the markets with the country's big picture in mind. Beijing has been attempting to cool the economy for months -- and by some measures has succeeded. Gross domestic product growth slowed to an annual rate of 9.1% in the third calendar quarter from 9.6% in the second. That's bad news for investors in Brilliance China Automotive Holdings Ltd. (CBA ), the first Chinese company to list in New York back in 1992. Brilliance, which has a venture to assemble cars with BMW, has seen the price of its shares fall by half in the past six months as credit tightening has sent auto sales skidding. "It's a red flag for all the auto companies at the moment," says Adrian Mowat, regional equity strategist at J.P. Morgan Chase & Co. () in Hong Kong.

But unlike the last time Beijing slammed on the brakes in the early 1990s, the slowdown hasn't affected all shares. Yanzhou Coal Mining Co. (YZC ) and oil driller CNOOC Ltd. (CEO ) are up thanks to China's massive hunger for energy. And when Air China goes on the market with its planned $500 million IPO early next year, it's expected to pull in thousands of excited investors, since it boasts a dominant position in the world's fastest-growing aviation market.

Indeed, the upcoming China IPO pipeline presents several interesting opportunities. Bank of China looks as though it will be the first of the Big Four state-owned banks to list, probably in the second half of next year, as management pares nonperforming loans and strengthens capital through bond issues. And China Netcom Group Corp., the mainland's second-largest fixed-line phone operator, is looking to raise $1.2 billion with dual listings in Hong Kong and the New York Stock Exchange in November. "There's always an appetite for world-class companies," says Spencer White, Asia-Pacific strategist at Merrill Lynch & Co. (MER ) in Hong Kong. More than ever in China, success or failure will depend on facts and hard numbers rather than on market hype.

By Frederik Balfour in Hong Kong

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