Chinese Companies Will Be IPO Fixtures in the U.S. in 2011

Updated IPO IPO

Look for Chinese companies to keep the U.S. initial public offering pipeline primed in 2011, coming off a year when they accounted for nearly a third of U.S. IPOs and helped push the domestic IPO market toward recovery. Still, when it comes to participating in private exchanges like SharesPost, Second Market and Xpert Securities, Chinese companies are virtually absent.

In some respects, it seems surprising that so few Chinese companies are participating in these private exchanges, given that investors seem to be jumping into Chinese stocks in a big way. On these exchanges, investors, venture capitalists and employees of private companies try to sell their shares to eager buyers based on a price acceptable to both parties. While these private transactions provide investors with some liquidity, they're not as fluid as a traditional exchange like Nasdaq or the New York Stock Exchange, which have far more investors buying and selling stocks.

Nonetheless, privately held Facebook, for example, has seen plenty of action from investors on SharesPost, which recently held its first auction for investors in the social networking giant.

No Takers Yet

Xpert Financial will formally announce Xpert Securiites as a subsidiary on Monday, which currently has only private U.S. companies trading on its alternative trading platform. And while SecondMarket doesn't have any China-based companies on its exchange, it is exploring opportunities in Hong Kong and has seen significant interest among Asian investors and financial advisers, says SecondMarket spokesman Mark Murphy via email.

SharesPost, however, did have one China-based company among the roughly 140 companies on its list. YouTube-like is listed there, but it has yet to have takers willing to buy or sell their shares. maybe looking to test the waters, following the move by China-based rivals Tudou, which filed in November for an IPO to be listed on the Nasdaq and, according to Reuters, is aiming to raise $100 million with an IPO in the first quarter. And video rival Youku (YOKU) went public on the New York Stock Exchange on Dec. 8, raising nearly $202.9 million and now carrying a market cap of $3.3 billion.

"Valuations With a Grain of Salt"

One IPO analyst, however, cautions investors that the way a company performs on a private exchange isn't likely to be comparable to its performance as a public company.

"Private exchanges are not a truly liquid market, so you have to take those valuations with a grain of salt," says Paul Bard, analyst with IPO research and investment firm Renaissance Capital in Greenwich, Conn. "When you have a significantly large transaction on one of those private exchanges, like a VC bought a significant number of shares, that would be worth looking at. It would probably in the ballpark [of the company's true value]."

In sizing up the market for 2011, Bard says he expects Chinese companies to launch U.S. IPOs at a similar level as last year. In 2010, they accounted for 41 IPOs in the U.S., he notes.

More Selective Now

On the demand side, Bard says interest is strong, but it's not like the go-go days of the late-1990s' Internet bubble. He notes that investors aren't viewing Chinese company IPOs as a pot of gold. Rather, they're being selective in terms of which IPOs to support.

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"If all Chinese companies are going to market at 50 times earnings and trading up substantially once they're public, then I would say we're at risk for a bubble," Bard says. "But the IPO market for Chinese IPOs is not a bubble by any means."

The IPO market's overall health is expected to pick up in the New Year, considering that more institutional investors moved into equities and out of bonds toward the end of 2010, Bard says. And with new money flowing in, money managers are more apt to direct funds toward IPOs, since they won't have to sell holdings in their portfolio to participate in new issues. Bard notes that dynamic should make for a healthy and sustainable IPO market.

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