March 16 |
March 16 (Reuters) – As the first Chinese company to
tap the U.S. stock market since last August, online discount
sales site Vipshop faces a tough challenge – restoring
confidence in a sector rocked by accounting scandals and slow
growth.
The company, which sells designer goods at a discount for a
limited time period, is trying to win over investors scarred by
recent Chinese IPO flops by associating itself with high-profile
investors, underwriters and auditors.
Vipshop, backed by top Silicon Valley venture capital firm
Sequoia Capital, has hired Goldman Sachs and Deutsche Bank as
underwriters.
A strong public debut could help convince investors to sink
money back into Chinese companies that have IPOs in the works.
And it comes at a time when sentiment toward Chinese companies
has improved thanks to changes in the way they report income and
list shares. Yet a number of factors are likely to keep
investors wary, bankers, lawyers and analysts say.
“We’ve seen some renewed interest from U.S. investors, but
we don’t want to say that the window is open yet,” said John Ma,
head of Asia equity capital markets at Roth Capital Partners,
who advises Chinese companies on IPOs. “Overall, people are
being cautious.”
Vipshop is hoping to sell 11.2 million American Depository
Shares on Thursday at $8.50 to $10.50 a share, raising $106
million at its midpoint. Its ADS’s are due to list on the New
York Stock Exchange next week with the symbol “VIPS.”
The listing comes as the company’s performance is lagging.
While Vipshop reported that its revenue increased to $227.1
million from $32.6 million last year, its losses widened to
$107.3 million from $8.4 million. The company said its net loss
last year includes share based compensation expenses of $73.9
million.
Besides its lack of profits, Vipshop may also raise eyebrows
due its corporate structure, known as a variable interest
entity, or VIE, which lets Chinese companies bend certain rules
forbidding foreign investment.
Last year, media reports circulated that Chinese regulators
could be taking a closer look at this type of investment
vehicle. Vipshop said in its F-1 filing that such scrutiny could
cause significant business disruptions, including “confiscating
our income, revoking the business licenses (and) shutting down
our servers.”
Such concerns put off some potential buyers.
“Investing in an IPO is risky enough, but with this company
there are too many layers of risk,” said Francis Gaskins,
president of IPOdesktop.com, an IPO research firm.
Adding to investor fear is a growing trend among U.S.-listed
Chinese companies to go private after facing massive declines in
value on public markets, which forces investors to take losses.
Some of these companies plan to eventually relist in Hong Kong,
where stocks are trading at a 45 percent to 50 percent premium
to those listed in the U.S.
According to Roth Capital Partners, 10 U.S.-listed Chinese
companies went private in 2011, compared with none in the prior
year.
In comparison, there were 12 U.S. listed Chinese IPOs in
2011, down sharply from 41 listings in 2010, according to
Connecticut-based research firm Renaissance Capital.
“These companies going private has added to the anxiety of
U.S. investors because these companies’ founders are buying back
shares from the public markets often at a fraction of what they
sold them for,” said Tom Murphy, a securities lawyer at
McDermott Will Emery.
“People then don’t trust the accounting and it adds to
skepticism about how transparent these markets are and how fair
they are compared to the U.S.”
Investor demand for Vipshop will also affect the ability of
other Chinese issuers to tap U.S. public markets. Four Chinese
companies have filed to go public in recent weeks, including
AdChina, China Auto Rental, Cloudary Corp and Newsummit
Biopharma Holdings.
So far, none of the offerings have been marred by the
scandals that hit a slew of Chinese companies, including
Sino-Forest and Longtop Financial Technologies last
year. All are eschewing the reverse merger, a tactic used
heavily by Chinese issuers in the past, which has been
criticized for letting companies bypass regulatory scrutiny they
would otherwise encounter in a traditional IPO.
The USX China Index, a key tracker of U.S.-listed companies
that generate the majority of their revenue from China, is down
17 percent from the same period last year. Some bankers believe
that means the Chinese IPO market may rebound as investors look
for bargains.
“A few bad apples poisoned the barrel, but there’s a price
at which investors will put their money in,” said one capital
markets banker who has worked with Chinese companies. “I just
don’t buy that the market is never going to come back.”