The Wild West

It’s been a rollercoaster ride for many Chinese companies with listings on the US stock exchangesby Isabel Ding

A recent trend among Chinese companies looking to raise capital and cultivate a more international image has been to get a listing on one of the US stock exchanges either through the traditional IPO process or a reverse takeover (RTO)， in which the Chinese company acquired an already-listed company， bypassing the lengthy and complex process required in an IPO.

In the aftermath of the global financial crisis it seemed that the story of the Chinese economic miracle was all it took to sell US investors on Chinese company stocks. According to a report by Ernst and Young， Chinese growth companies dominated the cross-border listings on US exchanges in 2009， raising USD 2 billion through 14 deals. In 2010， 32 Chinese companies listed on the US exchanges.

It looked like 2011 was set to be another banner year for Chinese stocks on the NASDAQ and NYSE， with 12 Chinese companies launching US IPOs in the first five months of this year alone. But suddenly， the IPO surge and climbing share prices have come to a halt. Since March， 24 Chinese companies listed in the US have released information regarding auditor resignations or accounting issues， and 19 Chinese companies saw US regulators suspend trading on their stocks， including China MediaExpress Holding (中國高速傳媒) which was delisted.

During the following weeks， some American independent investment companies also issued negative reports on select Chinese companies， claiming that they had been “aggressively committing fraud” (see Obizuary in this month’s issue). The fallout from this news seems to have affected the share price of many “Chinese concept” stocks， even those with healthy balance sheets.

The NASDAQ China Index， which tracks major Chinese stocks trading in the market， has dropped nearly 20% in under 40 days， from USD 243.45 on May 2 to USD 196.83 on June 10. The price of some Chinese stocks has plunged more than 50%. Most of the companies with accounting problems got their US listings through a reverse takeover (RTO)， which involves less scrutiny into a company’s balance sheet than the traditional IPO process. Though it should be noted Chinese companies are not the only ones who use an RTO to obtain a stock market listing， and not all RTO-listed companies are problematic.

According to a survey by the US Public Company Accounting Oversight Board， there are 159 Chinese companies that listed in the US by means of an RTO from 2007 to March 2010， three times the number of Chinese companies who launched normal IPOs in the US over the same period. “An RTO itself doesn’t create problems. Those companies each have problems for their own reasons，” says Chen Gongmeng， president of China Venture Capital Research Institute (CVCRI).

Analysts also believe another reason for the recent fall in the share price of US-listed Chinese company shares is the short selling feature of the American capital market. According to one report from Securities Daily， a Chinese newspaper， “unlike the market in China， the short selling system allows American investors to profit even when share prices are dropping， which is one of the major reasons Chinese company stocks are suffering a continuous decline in their share prices，” says Shen， who is responsible for overseas listing firm HL Consulting.

To mitigate the effects of the plunge in their US share price， many Chinese companies have begun a share buyback in hopes of restoring investor confidence. Statistics from ChinaVenture show that seven Chinese companies announced share buy backs in June， including NetQin (網秦)， Dangdang (當當網) and Bona Film Group (博納影業集團)， all of whom first listed in the US less than a year ago. Whether the buyback programs will help burnish their image with American investors and get their stock price back on an upward course remains to be seen.

What follows is a snapshot of three of the most dynamic sectors， Internet， Education and Alternative Energy where Chinese companies have US listings， along with a rundown of Chinese companies from all sectors with listings on US exchanges.