No derailment for IPOs abroad
By Mo Fan and Zhang Zhengyan (China Business Weekly)
Updated: 2004-05-25 15:49

China's initial public offering (IPO) procession will stay on track, despite recent unfavourable reports about some US-listed Chinese companies, say analysts.

They said international backers, particularly from the United States, were still enthusiastic about China's IPOs, although some accounting controversies have been revealed with certain Chinese companies that have gone public on overseas markets.

"I think the demand (for IPOs) at the moment exceeds supply," said Alex Tan, vice-president of corporate finance with Hong Leong Finance.

Tan said he has not seen a slowdown in demand from Chinese companies despite fears that the brakes could be applied on one of the world's fastest-rising economies.

China's recent tightening of investment rules is aimed at fixed-asset industries, but other industries such as export-related and IT industries will continue to grow, he said.

China's biggest online gaming firm, Shanda Interactive Entertainment Ltd, raised US$152.4 million during an IPO on the US market in the middle of this month, after having to cut its minimum price by 15 per cent.

The Shanghai-based company and its existing shareholders sold 13,854,487 American depositary receipts (ADRs) at US$11 each, compared with the US$13-$15 price range indicated in a Securities and Exchange Commission (SEC) filing.

The disappointing IPO was partly due to two lawsuits the company was involved in regarding alleged licensing and patent infringements.

But some analysts say the company's outlook is still optimistic.

"Online gaming is a hot area and Shanda is the biggest. Whenever you're a leader in an embryonic area and you're profitable, somebody will buy it," said Francis Gaskins, an analyst with IPODesktop.com, the leading provider of independent IPO research for professional money managers and individual investors.

The online gaming operator is dealing with the legal action from Korean game developer Wemade Inc, which claimed that Shanda has violated its copyright.

Shanda specializes in what is known in the gaming world as massively multiplayer online role-playing games, or MMORPGs.

Users pay Shanda a fee -- usually 3-7 US cents an hour -- to play one of its games.

At its peak, Shanda had 1.4 million people playing games simultaneously, according to offering documents filed with the SEC.

According to the company's prospectus, much of its revenue is derived from just one game, "The Legend of Mir II," which accounted for 56.7 per cent of its US$29 million in sales in the first quarter.

Combined, "Legend of Mir II" and a second game, "The World of Legend," accounted for 87.5 per cent of its revenues.

Highlighting China's IPO woes is China's top life insurer China Life, which is already facing an informal inquiry from US securities regulators and class action lawsuits from US investors over an audit into accounting irregularities, as well as a probe by Hong Kong's market watchdog.

This, combined with concern over China's credit tightening policies, recent IPO companies have under performed.

Linktone, which provides entertainment-oriented wireless value-added services to mobile phone users in China, has slipped 18 per cent since its IPO in early March, while TOM Online has shed one-quarter since its March debut.

By contrast, the average IPO over the past six months has gained 13 per cent, according to data from Thomson Financial in New York.

Still, other Chinese firms are lining up for listings in the United States. They are hoping time will heal the wounds.

Chinese online travel agent eLong.net and Internet-based recruitment group 51job.com are among the list of companies planning to float on the US stock market.

Both companies, together with Chinese online gaming firm the9.com, have appointed advisers to carry out IPOs worth at least US$100 million.

Investment bank Credit Suisse First Boston is believed to be preparing the IPOs of both eLong.net and the9.com, and Morgan Stanley is understood to be working on 51job's IPO.

Meanwhile, investors are becoming more selective and analysts say it will take a lot of work to convince people to get on board the Internet companies.

"Because of economic cooling efforts and fears of accounting irregularities, markets have been falling," said BEA Securities analyst Sam Ho. "That means that new listings must be of a high quality and attractively priced. Otherwise, I don't expect strong interest."

Rowena Chu, head of equity capital market at Deutsche Bank, said: "The recent profit-taking is healthy for the market. In my view there will be some reassessment by the market and there is likely to be a more selective approach where quality companies will outperform the broader market."

Bankers also stress that institutional investors remain enthusiastic for Chinese companies and the long-term economic outlook for China is strong.

"The first wave of listed companies was focused on the wide range of e-commerce and Internet portals, but now people are looking more at the IT industry," said Fang Xindong, an IT analyst.

"I believe the Internet will keep booming for many years. Therefore, related IPOs will heat up."

Michael Yin, a Shanghai-based senior Internet analyst, said: "It is not a case of overheating, but of a business growing." Although some stringent steps have been taken by the central government, experts say that as long as there is no tightening on the entire economy, international investors will stay up-beat about China's IPOs.

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