Nasdaq-NYSE Rivalry Comes to China
Not so long ago, listing their shares on Nasdaq was a no-brainer for Chinese tech companies looking to tap overseas money. The 52 mainland companies currently trading on Nasdaq include Internet portals such as Sohu (SOHU), Netease (NTES), and Sina (SINA), which listed their shares in 2000. More recently, Chinese highfliers, including search engine Baidu (BIDU) and Focus Media (FMCN), both of which had Nasdaq initial public offerings in 2005, have made spectacular gains.
But in 2007, Nasdaq has faced greater competition in China from exchanges in Hong Kong, Shanghai, New York, and elsewhere. Although it has attracted nine new IPOs raising $1.7 billion this year, according to Dealogic (compared with five listings raising $534 million last year), only one Nasdaq listing—a $300 million deal by financial-services company Xinhua Finance Media (XFML)— managed to rank in the top 20 on the basis of overall funds raised. So far this year, the Hong Kong exchange has raised $28.6 billion with 49 listings of Chinese companies and the New York Stock Exchange (NYX) has raised $4.19 billion with 14 listings.
Now the competition between Nasdaq and the New York Stock Exchange has moved to Chinese soil. On Dec. 3, Nasdaq opened a Beijing office. The NYSE is hot on its heels with plans to open an office of its own on Dec. 11. They both want to attract more Chinese companies' initial offerings. China is now the single largest source of offshore IPOs and secondary listings, generating 232 deals worth $59.4 billion worldwide.
Alibaba's Rebuff to Nasdaq
The attempts by both exchanges to woo more Chinese companies come at a time when other rival exchanges are aggressively courting them, too. While the NYSE and Nasdaq raised $5.7 billion for Chinese companies through IPOs this year, Shanghai was not far behind, with $4.2 billion. Shanghai has also raised tens of billions more in secondary listings of companies already traded in Hong Kong. Singapore raised $1.54 billion and the London AIM market $1.53 billion.
The biggest blow to Nasdaq, observers say, was business-to-business portal Alibaba.com's decision to eschew the American exchange in favor of Hong Kong, where it raised $1.7 billion and began trading on Nov. 6. The company figured it could get a higher price for its stock because Hong Kong was closer to home, and investors understand Alibaba's business model better than overseas investors do. That assumption proved correct: The retail portion of the IPO was 251 times oversubscribed, and the stock soared 192% on first trading day (BusinessWeek.com, 11/6/07). Despite a major correction in the Hong Kong market recently, Alibaba's stock is still up 186%.
"Over the past six or seven years, Chinese companies followed conventional wisdom that you had to list on Nasdaq," says Porter Erisman, vice-president of corporate affairs at Alibaba. "In Hong Kong we decided to make the market [and attract institutional investors] rather than follow conventional wisdom."
Chinese Frustrated by Cost of U.S. Investor Relations
Erisman said that one drawback to Nasdaq was the tendency of investors and analysts to apply a cookie-cutter approach to company analysis, which doesn't necessarily fit mainland companies. "In China leading portals are frustrated with dealing with [the] investment community in the U.S., where you have to spend a lot of money and time educating investors about local conditions.
Of course, companies will list in markets wherever they can get the highest valuations. Valuations, in turn, reflect both current market conditions, which have given Hong Kong a decided edge over New York for much of this year, as well as investors' familiarity with stocks. For example, Chinese solar panel makers Trina Solar (TSL), China Sunergy (CSUN), LDK Solar (LDK), Yingli Green Energy Holding (YGE), and JA Solar (JASO) have all listed in the U.S., where alternative energy stocks are well understood. By contrast, garment maker China Dongxiang listed in Hong Kong, raising $880 million because its Kappa brand is well-known by retail investors there.
Although Erisman says that the onerous compliance conditions required under Sarbanes-Oxley were not an issue because Alibaba's parent company is 39% owned by Yahoo! (YHOO), market participants say for many companies the cost of complying with SarbOx can be a major deterrent to listing in the U.S.
Class Actions a Headache for U.S. Listings
Another factor giving Chinese companies pause is a recent spate of class actions brought against U.S.-listed companies by shareholders. On Nov. 27, Shanghai game company Giant Interactive (GA) was sued for alleged IPO fraud, while Focus Media was slapped by a suit over nondisclosures in its prospectus for a secondary offering made in early November on Nasdaq. Neither company has responded to e-mail queries. A class action against solar panel maker Sunergy was filed in October.
"It's a litigious environment and definitely that has an impact. That will be one of the biggest obstacles in terms of convincing Chinese issuers of the benefits of an offshore listing," says Jason Cox, co-head of equity capital markets at Merrill Lynch (MER) in Hong Kong. There has never been a class action filed in Hong Kong because there is no legislation enabling it. However, Hong Kong has more rigorous profitability requirements than Nasdaq. Prior to listing in Hong Kong, a company must have shown profits of at least $3.9 million for each of three consecutive years.
Of course, despite the cost and effort of obtaining and maintaining a U.S. listing, some Chinese companies prefer the prestige and good housekeeping seal of approval that a U.S. listing implies. However, more large American institutional investors are opening offices in Hong Kong precisely because so much Chinese IPO money is ending up there.