China economy booms, its US IPOs struggle

China continues to grab headlines these days. Naturally, so do its IPOs on US shores. Renren’s public offering was a hot topic earlier this year, not only for being one of the first social media companies to go public, but also for being the latest in a string of high-profile companies coming from China (Youku, Baidu, Sina etc.). At the time, it seemed like a potential gold mine for investors. After all, if China’s growing so much, shouldn’t this year’s Chinese IPOs on US soil see equally amazing growth numbers?
Daniel Hom

China continues to grab headlines these days. Naturally, so do its IPOs on US shores. Renren’s public offering was a hot topic earlier this year, not only for being one of the first social media companies to go public, but also for being the latest in a string of high-profile companies coming from China (Youku, Baidu, Sina etc.). At the time, it seemed like a potential gold mine for investors. After all, if China’s growing so much, shouldn’t this year’s Chinese IPOs on US soil see equally amazing growth numbers?

The amount of red should be a clear answer. We’ve seen 13 IPOs from China this year. Only one has grown from its offer price. Renren, after a great start, now belongs to the dubious group of top-5 worst performing IPOs of this year's class. China Century Dragon Media had its trading halted a month after going public and is already delisted.

One might point to greater trends and swings in the IPO market as a defense, that Chinese IPOs are simply following the rest of the market, but those possible explanations don’t hold. The average IPO has fallen about 8%, while Chinese IPOs see an average fall of more than 37%. The technology industry, while weak, still sees companies like LinkedIn and Yandex perform way above average. And China itself continues to boom in these tough times. So what’s the story with most of these 13 companies?

In an interview with CNBC back in June, Hong Kong Exchanges and Clearing CEO Charles Li proposed a stunning answer.

“I do understand there are quite a few Chinese companies that are into a lot of problems over here [in the U.S.], and I was looking at them and I don’t really know how they ended up here—because none of those companies, or the majority of them, would not have seen the light of day in Hong Kong through our listing committee processes.”

When asked if these companies would have passed Hong Kong listing requisites:

“Absolutely not. Because of their profit track record and their management presence record—they wouldn’t even be considered.”

If this trend continues as the year comes to end, it may not be difficult to see why.