Online marketplace provider 58.com, the Chinese equivalent of Craigslist, had a debut to remember on October 31. Its shares leaped by 41.9% as investors gobbled up whatever they could find in the secondary market after more than a third of the 650 that bid for its $187m IPO were left empty-handed.
If 58.com’s performance was impressive, Qunar’s $167m debut was astounding. Shares in the online travel service provider shot up 89% on November 1. Investors simply could not stop buying into the Chinese tech story.
And that's the point. The main attraction lies in the fact that China, despite being home to some of the world’s largest technology companies, only had 591m internet users as of the end of June 30, a modest 44.1% internet penetration rate, according to China Internet Network Information Center (CNNIC). South Korea has a penetration rate of 81.1%.
Investors are clearly banking on the huge potential upside to China’s internet market. So much so, in fact, that they are willing to overlook that Qunar has yet to record a profit.
It's hard to argue that they are wrong to bet on growth in that sector. The number of internet users in China increased by 25.56m in the first six months of the year, more than the populations of Hong Kong (7.2m), London (8.2m) and New York (8.3m) combined.
It is no surprise, then, that companies such as online sports lottery business 500.com, mobile phone app developer Sungy Mobile and car information portal Autohome have all filed to list in the US.
But this does not mean that the US is open to any Chinese company. Those whose stories are not tech-related should be prepared for the cold shoulder. Broader US investor sentiment has not returned for Chinese companies. It is certainly a long way from the heydays of 2009-2011, when there were 67 listings worth $8.3bn.
And no wonder. Chinese companies have largely hit the headlines for accounting scandals. In some cases these have even led to fraud charges brought by regulators or the dissolution of companies. One of the earliest examples of this was Sino-Forest Corporation, which filed for bankruptcy last year after a highly critical research report in 2011. The Bloomberg China-US Equity Index, which tracks the 55 most-traded Chinese shares in the US, fell 58.5% during the five month period after that report.
With valuations going down the drain, there have actually been more Chinese companies delisting from the US market instead of looking to list on it. Fifty companies have left US exchanges since 2012 compared just seven IPOs, and all but one of those flotations were in the technology sector.
There has been negative news surrounding Chinese technology companies. NQ Mobile was subjected to a critical report just one week before the IPOs of 58.com and Qunar. But Chinese tech has generally had a Teflon quality that has made it largely immune to bad press.
The China growth story, while far from over, is entering a different, more mature, phase. Against this backdrop, tech companies, where the potential for increase in business is simply vast, stand out as exceptions. That is why they have been snapped up, not because the US investor base has suddenly become blind to all doubts over broader Chinese growth. Issuers who don’t make gadgets and apps would do well to remember that.