March 2015 Newsletter

China Redux

2014 was just maybe the year of the “comeback” for Chinese public issuers in North America as investors saw 15 Chinese companies listed on North American stock exchanges. The most notable 2014 listings of Chinese-based companies were Alibaba Group Holding Limited and Weibo Corporation, China’s Twitter-like micro-blogging service; the latter raised US$285 million on the NASDAQ.  In September 2014, Alibaba offered its shares to the market at US$68, raising $21.8 billion for its initial public offering. After reaching a high near US$120 in November 2014, Alibaba shares closed at $85.12 on February 27 2015, giving investors a holding return of 25.1%.

Interestingly, the top five Chinese IPOs with the most funds raised in the US in 2014 were all technology-based companies, including online retailer Inc., and mobile-based social networking platform Momo Inc.  According to Bloomberg, other Chinese-based internet and technology companies including Wowo Ltd. and Xiaomi Corp. are still planning North American listings in 2015.

Estimates of the total number of “significant” Chinese companies that will list in the US in 2015 are in the range of 15-20.  The basis for renewed interest likely lies in the passage of time to a large degree as investors tend to forget about the scandals that several Chinese companies were involved with on the North American public markets over the past five years.  There have been no new scandals recently and perhaps investors are focusing on the positive growth opportunities facing Chinese companies rather than the idea that they are all “not to be trusted”.

In a related matter, lawmakers in the US recently threw out a “frivolous” lawsuit against a Chinese-based US-listed company as evidence of changing perceptions in the market from the regulatory side of the coin.

Of course, all this renewed interest in Chinese-based companies has not yet made its way to the TSX or the TSXV in a significant way.  However, there do appear to be a number of new Chinese-based transactions that we are aware of that are in the planning stage to launch on the TSXV in 2015.  One of the reasons for the lag or slower take up of interest in Chinese-based companies on the TSXV is likely that the TSXV is dominated by retail investors who generally lag institutional investors in and out of market trends.  In our experience, if this is the case, one can expect that the trend toward North American investors “once again” investing in Chinese-based companies will trickle down to the TSXV in the coming months.

Given our positive view of China and its opportunities, we have continued to cultivate relationships with Chinese companies over the past several years that aspire to list on a North American stock exchange.  By taking a long-term view with respect to the prospects of the Chinese economy, one can perhaps start to see past the corporate governance scandals and focus on the opportunities that the soon to be largest economy in the world presents to investors.

While global investors are paying closer attention to the opportunities presented by Chinese companies, they are certainly conducting intense due diligence prior to making their investment decisions.  Correspondingly, Chinese companies planning to go public in North Americahave become more cautious in choosing banks, accounting firms, law firms and other advisors. The advisory firms that have been involved in China for many years and have continued to do so through the recent “drought” are likely the best candidates to work with.

In summary, our view is that the opportunities in this Chinese redux are tremendous assuming one has a long-term outlook.  The long-term outlook for the Chinese economy is that it will become the world’s largest economy in the next 20 years; investors should be able to profit well from this given adequate due diligence, proper planning and associating with the right advisors.

Evans & Evans have been involved in China and other parts of Asia for our 20 years working with companies in a number of capacities including:

  • assisting Asian private companies with going public in North America;
  • buy-side Mergers & Acquisitions work with companies based on China and Asia; and,
  • facilitating commerce between North America and Asian companies including setting up joint ventures, marketing and distribution arrangements.

The majority of Evans & Evans staff are fluent in English and Mandarin Chinese; thus, we are well-suited to work with Chinese companies across a broad range of business activities.

Please feel free to contact us at your convenience.

Michael A. Evans, CFA, MBA, CBV, ASA

Tel: (604) 408-2222
Fax: (604) 408-2303