For American investors, love of technology has conquered a fear of China. Shareholders are snapping up shares of Chinese Internet companies going public stateside. It’s a striking contrast with the recent past, when accounting scams and poor governance prompted many to shun Chinese stocks.
The travel booking website Qunar, which doubled in value on its first day of trading on Nov. 1, is the prime example of the new boom. The same week, shares in the local listings group 58.com â€" billed as China’s Craigslist â€" jumped almost 50 percent on their debut. The interest is proving contagious: Autohome, a car shopping website, filed for an initial public offering in New York on Nov. 5. The online sports lottery operator 500.com and the mobile applications group Sungy Mobile are also preparing to go public.
It’s less than three years since a series of frauds and accounting scams cast a shadow over Chinese companies listed in the United States. Valuations tumbled and I.P.O.’s dried up. Even now, just four Chinese companies have listed in the United States this year, according to Thomson Reuters, raising a total of $358 million. Back in 2010, those figures were 10 times as large.
The latest batch of listings still raises some red flags. Due to Chinese government ownership restrictions, mainland Internet businesses can only be listed overseas by setting up “variable interest entities,†which their offshore parents control through contracts rather than direct shareholdings. The accounts of the new listings are prepared by Chinese auditors, which aren’t supervised by American accounting regulators.
Existing ownership offers some reassurance. The Chinese Internet giant Baidu retains a controlling stake in Qunar, while Autohome has been under the control of Telstra, the Australian telecommunications company, since mid-2008. Nevertheless, investors seem more interested in buying growth than pricing risk. Internet stocks listed in the United States are up 25 percent since the end of June, and China’s expanding economy and increasingly active consumers are powering revenue.
As for all Internet stocks, valuations could prove vulnerable to increased competition or technological changes. Well-known Chinese worries just add a further level of uncertainty. But for now, rapid revenue growth is trumping caution.
Peter Thal Larsen is Asia Editor of Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
