5 Chinese ASX IPOs

Chinese companies looking for international exposure and recognition are increasingly turning to Western stock markets for initial public offerings.  The crown jewel of market listings for high profile companies remains in the US, and the recent success of the IPO of Jd.com (NASDAQGS: JD), a company many analysts refer to as the “Amazon” of China, supports that notion.  The stock closed its first day of trading on 22 May at US$20.90 and now trades over $25.  The issue price was $19.00.  Next up in US markets is Alibaba.com, a company that some experts view as combining elements of Amazon; EBay; and PayPal.   Speculation already abounds that the Alibaba IPO will be the largest ever.

The ASX is also proving attractive to an increasing number of Chinese companies for a variety of reasons.  First off, Chinese regulators have made it harder for small to medium sized businesses to list in Shanghai or Shenzen in an attempt to stem fraud and misleading claims from both advisors and issuing companies.  Going into the end of 2013 China had not had an IPO since October 2012, but the CSRC (China Securities Regulatory Commission) began IPO approvals in January this year.  However, the CSRC estimated it could take up to a year to clear the backlog of more than 700 companies waiting for IPO approval in Shanghai or Shenzen.

Second, IPO experts claim these Chinese companies are more interested in credibility than a quick profit and the tougher regulatory environment on the ASX is seen as a benefit rather than an obstacle.  In an August 2013 article in the SMH, Asia Pacific Capital investment manager Eric Gao stated that some Chinese companies prefer not to be associated with the scandals clinging to US Chinese stocks.  In addition, the listing requirements of the Hong Kong Exchange are considered burdensome and favor State Owned Enterprises (SOE).  In Gao’s view, the ASX is an attractive alternative for smaller private Chinese companies.

Another IPO expert, Novus Capital’s Nick Kapes, stated that Chinese businesses looking for entry on the ASX are maintaining a high percentage of ownership, generally issuing between 5 per cent and 25 per cent stake.

IPO investing is a high risk proposition for retail investors and some experts advise against trying to “get in on the ground floor.”  To test that belief we have uncovered five Chinese companies launching on the ASX between late November 2012 and mid-February 2014.  The following table lists the companies with issue prices and share price performance from the stock’s first trading day to 26 May of 2014.  Here is the table listed by market cap.

Information Technology company TTG Fintech Limited (TUP) is the only stock to produce substantial gains, although it has been trading the longest.  However, a two year share price performance chart shows the rise started slowly.  Here is the chart.

Although the price performance is impressive, comparing the issue price against the opening trading price serves as an example of the myth of retail investors getting in on the ground floor with most IPO’s.  The “ground floor” was the issue price of $0.60, available to institutional investors and select high net worth individual investors.  The average retail investor jumped in at a price 25% above the issue price floor.  When you read breathless commentary about the spectacular gains for IPO investors, the gains typically use the issue price as the base, not the opening trading price.

The company is a software and technology developer with a revenue generating subsidiary, Shenzhen Taotaogu Information Technology Co. Ltd, which in turn partners with UnionPay Financial Network to provide mobile payment capabilities to financial institutions and businesses.

TTG has a digital verification technology called Electronic Financial Authentication that ensures safe and speedy authorisation for both online and offline transactions.  The substantial upward spike in share price you see on the chart came after the company announced that Shenzhen had reached a framework agreement with a leading Chinese third party online payment solution company to use its Electronic Financial Authorization technology.  Shareholders were treated to more good news on 11 April when the company announced a joint venture with another high-tech payment solution developer to work on a light-related, or photonic, payment system to replace card swiping.

Perhaps the most promising aspect of this company is the partnership with state-owned China UnionPay, which has near monopoly status in the country’s bankcards.  Despite this fact, a subsidiary of Alibaba.com, AliPay, holds the title of the leading online payment processor in the world, beating US based PayPal in February of this year.  The following graph from the website chinainternetwatch.com shows the market segmentation of mobile payment processing in China.

Already the third largest in online payment processing, TUP gaining market share through the recently announced framework agreements is likely to be good news for shareholders.

The fourth largest online payment processor, 99Bill, is part of recent entry to the ASX 99 Wuxian Limited (NNW).  Although classified as a retailer, NNW is an m-commerce (mobile) Internet stock, proudly labeling itself as “China’s largest mobile banking shopping mall.”  The company’s mobile e-commerce platform goes beyond the traditional online shopping site, offering mobile access to living services such as transportation and entertainment reservations and tickets; physical goods such as clothing and electronics; and virtual goods such as phone and game recharge and electronic coupons.

99 Wuxian’s business model is somewhat unique, as it in effect acts as a digital intermediary between its more than 50 partnering banks and businesses and end users of the products and services offered.  The company had about 30 million users as of the end of 2013.  In addition to the mobile platform, 99 Wuxian offers three product categories to its partners.

The 99 Business Circle provides a variety of customer service applications for financial institutions, eliminating the need for in-house personnel.

Marketing Management Service (MMS) is a complete online marketing management platform enabling a full range of marketing activities, including tracking of the effects of marketing efforts.

The Digital Gold Mine is a data mining system for both domestic and foreign financial institutions allowing in-depth analysis of customers and products.

Since it joined the ASX the company has released a stream of positive news, but the share price is down about 10%.  Here is the price performance chart.

Positive announcements of substantial growth in partner arrangements and end users did not do much to impact the stock price, but since the company reported a profit of RMB 3.019 million on 24 February, the share price has been creeping higher.  Following the announcement the company was launching a mobile game platform NNW was actually issued a speeding ticket from the ASX!  The company’s Quarterly Update released on 02 May showed a 48% increase in end users and a 21% increase in revenue.

While it is not certain NNW will follow in the footsteps of TUP with a rising share price, it is notable that according to Bloomberg of the five Chinese Internet and Technology companies that debuted on US exchanges in 2013, all but one are now trading above their IPO prices.  TUP and NNW are operating in a high growth sector in an economy that many experts now predict will overtake the US to become the world’s largest economy by 2015.

Sunbridge Group Limited (SBB) is a retailer of higher-end menswear in China under the leading brands “PANDIST” and “AGUESEADAN “.  There are more than 400 retailers throughout China, including 5 company direct stores, selling the Sunbridge Brands, which target the upper-middle class across all age groups.  While this company may seem boring when compared to the hot Internet stocks, in its first annual report Sunbridge announced a dividend payment of $0.06 per share and posted a profit after tax of $AUD13.9 million for FY 2013; a 5% increase over the previous year.  The company has a P/E ratio of 6.13 and a P/S of 1.07.  The stock is thinly traded with an average volume of around 18,000 shares per day. Here is a price performance chart for Sunbridge since its inception on the ASX.

The final two stocks in the table debuted with seemingly solid prospects stemming from promising assets.  Sino Australia Oil & Gas Limited (SAO) launched on 11 December 2013 and less than three months later, it was suspended from official quotation on 03 March 2014.  It took coal miner U & D Coal (UND) less than a month to earn its official suspension, opening on the ASX on 17 February 2014 and followed on 13 March by the company’s voluntary request for suspension.

The issue with UND is bizarre at best and in some ways reminiscent of the Sino-Forest situation, although no evidence of fraud has been alleged in the case of UND.  Sino-Forest listed on the Toronto Stock Exchange and attracted the attention of some high profile hedge fund managers, among them John Paulson of the US.  Once it began to appear that Sino-Forest had overstated its assets, Paulson sold his stake for a loss of more than US$700 million.  One wonders how an investor like Paulson, with a bevy of analysts, accountants, and lawyers, could be fooled.

With U & D it appears that the company’s majority shareholder Australian Kunqian International Energy Co., Pty Ltd, asked for its money back, when it notified U & D management it was exercising a statutory right to require U & D to take back the 100,000,000 shares KQ held and refund the AUD$50,000,000 paid for the shares.  KQ is claiming “defective information” presented by U & D in the investment prospectus and is now seeking to restructure the UND board of directors.  Again, one wonders how supposedly expert KQ analysts could miss whatever it was they later found in the prospectus.

In the midst of all this, UND announced an Arrangements Agreement for a joint venture with Japanese mining company Sojitz Coal Mining Pty Ltd for UND’s  Meteor Downs South project in Queensland. While positive news, the company’s stock remains suspended so there is no way of gauging market reaction.

Sino Australia Oil and Gas Limited (SAO) is a holding company of Zhaodong Huaying Drilling Company (Huaying).   Zhaodong has patented drilling and oil recovery technologies and all its contracts are with Chinese State Owned Enterprises (SOE) like Petrochina, one of the largest oil and gas producers in the world.  Sino Australia forecasted a 22% revenue increase for FY 2013.

The initial suspension was for failure to release a mandatory periodic disclosure.

The company’s immediate response was that it had been unable to get all the required signatures from board members and the corporate secretary had resigned.  The matter went to the federal courts on 13 March when the ASIC obtained Orders restraining the company from any attempts to transfer funds obtained as a result of the IPO.  The ASIC expressed concern over a proposed but unauthorised transfer of $7.5 million.  The matter remains in the courts, with a decision expected on 02 June regarding funds transfers.  On 26 May Sino Australia issued a shareholder update stating management was “in active discussions with the ASIC to address and resolve concerns expressed by ASIC.”  They also announced positive forward orders for Zhaodong Huaying Drilling, but added the company could not pay for needed drilling equipment without the ability to transfer funds.

While the success of TTG Fintech thus far might embolden some investors to latch on to upcoming Chinese IPO’s on the ASX, the stories of UND and SAO shout Caveat Emptor.

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