China Goes Public

Earlier this month Zuoan Fashion (NYSE:ZA) began trading on the NYSE and became the second Chinese IPO in the U.S. in 2011.  This follows 2010, which had 34 Chinese IPOs and surpassed 2007 to become the highest year ever for Chinese IPOs in the U.S.. In fact, Chinese-based IPOs comprised roughly a quarter of the all U.S. IPOs last year.

Since nearly 2/3 of these 2010 Chinese deals were on the NYSE, we thought it important to take a closer look at them.  Here is what we found:

  1. Chinese deals dominated the IPO calendar in 2H 2010 and were mostly in the Consumer and Technology Sectors: 2010 Chinese IPOs were strongly weighted toward the end of the year, with more IPOs in Q4 than during the rest of the year.  In addition, these IPOs were mostly in the Technology and Consumer sectors: 16 of the 34 IPOs were Technology companies, and 10 were in the Consumer sector.  This trend has continued in 2011 with one IPO in the Consumer sector and one IPO in the Technology sector.
  2. 2010 Chinese deals received more favorable pricing than non-Chinese deals: Chinese deals saw an average initial file / offer pricing that was more than 12% higher than non-Chinese deals.  This premium is observable through all quarters and sectors except Financials. In fact, a greater percentage of Chinese deals priced within or above the filed-range than did other IPOs in all four quarters of 2010.  Technology deals in particular were in high demand, garnering strong premiums.  This pricing premium specific to technology was also observable across all four quarters in spite of the fact that most Chinese tech IPOs occured in Q4.  Consistent with IPOs in general, the two Chinese IPOs in 2011 have seen less pricing momentum, one pricing within the filed-range and the other below it. 
  3. 2010 Chinese deals saw strong price performance on average, but investors have been discriminating: While on average, 2010 Chinese deals saw more than double the first-day increase than all other IPOs, a closer look reveals that investors were discriminating by sector and even by company:
  • Chinese IPOs saw a wider distribution of outcomes than other IPOs in 2010:  Price performance, whether first day, first month, or current performance*, had a wider distribution for Chinese IPOs than for non-Chinese IPOs.  For instance, while 4 of the top 5 first-day performers in 2010 were Chinese, so were 5 of 5 of the worst first-day performers. The distribution of current performance is similar.  It is driven both by strong performers, such as Youku.com (NYSE:YOKU), and E-Commerce China Dangdang (NYSE:DANG) which are up nearly 194% and 61% respectively, as well as underperformers such as Mecox Lane (Nasdaq:MCOX) which is down 47% and Lentuo International (NYSE:LAS) which is down 36%.  Of the 34 Chinese IPOs, 18 are currently up, and 16 are down. 
  • Investors were discriminating by sector:  Though the average first-day price appreciation for Chinese IPOs was above that of non-Chinese deals, 2010 Chinese deals actually saw lower first-day price performance than their counterparts in all sectors except Technology and to a lesser extent Industrials.  Currently, among the sectors, only Chinese Healthcare IPOs are outperforming their non-Chinese counterparts.  Tech deals, while slightly lower than their non-Chinese counterparts, are still performing well, with an average premium to the IPO price of 48%.  Consumer deals, however, are considerably below their counterparts (see link below for more detail).
  • Even within sectors investors were discriminating:  The technology sector exemplifies how investors have been discriminating at the company and not just sector level.  Technology has clearly been a strong performing sector for Chinese IPOs.  However, even within this sector price performance tends to be bifurcated, with 4 of the 5 overall best first-day performers as well as the single worst first-day performer all being Chinese tech deals.  5 of the 18 Chinese tech IPOs experienced negative returns on the first day.  Similarly, 6 of the 18 Chinese tech IPOs are currently below their offer prices.

Finally, while Chinese IPOs were significant in the U.S. in 2010, they were even more significant on a global level: While Chinese companies raised over $4B in 2010, this pales in comparison to amount of capital raised on the Chinese exchanges themselves.  Combined, the Hong Kong, Shenzhen, and Shanghai exchanges raised over $140B last year. This included one of the largest IPOs ever, Agriculture Bank of China, which raised $22.1B.

For a more in depth analysis of price performance by sector and across quarters as well as a detailed list of all the 2010 and 2011 Chinese IPOs see here.  In addition, you may want to look at a report that our Beijing office put together on 2010 Chinese IPOs which includes a look at Chinese VC exits and IPO bookrunners.

*Current price performance based on opening prices on 2/25/11