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Mar 18, 2012
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Waters still murky for US-listed Chinese IPOs

Mar 18, 2012

March 16 - 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."

(Editing by Andre Grenon)

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