The reasons behind a flurry of Chinese technology companies listing ADRs.
Editor’s note: This special feature is sponsored by JPMorgan
From September 2004 to September 2005 ten new Chinese companies listed on Nasdaq, according to Silvia Davi, a spokesperson for the exchange. Many of the newcomers from China are technology companies, or have an internet orientation. Experts believe there are another dozen or so Chinese tech companies preparing to list on Nasdaq in the coming months.
Nasdaq trades 19 mn shares a day in companies based in China, mostly in the form of American depositary receipts (ADRs). JPMorgan created the first ADR in 1927 to enable Americans to invest overseas. Today, the ADR is an instrument widely used by non-US companies to access the American equity market.
Why are so many Chinese technology companies listing ADRs in the US market right now? The answer, says Kenneth Tse, JPMorgan’s head of ADRs for the Asia-Pacific region, lies in the Chinese market itself. ‘China has a booming economy, a growing middle class and a fledgling e-commerce sector,’ he points out. ‘It is attracting investments from venture capital firms worldwide.’
A US listing can be a smart exit strategy for venture capitalists, providing them with valuations in line with the international markets. The largest venture capital-backed IPO of last year was Semiconductor Manufacturing International Corporation (SMIC). This Shanghai-based company dual-listed in Hong Kong and on the NYSE, raising a whopping $1.8 bn and surpassing even Google, which listed in the same year.
Last year venture capitalists invested $1.3 bn in Chinese companies, up 29 percent from 2003, according to research firm Zero2IPO. Nine Chinese technology companies also listed their ADRs in the US in 2004, with JPMorgan acting as ADR depositary bank for four of them. ‘China is one of the most important markets in our global franchise,’ says Tse.
Eric Ho, chief strategy officer at Ninetowns Digital World Trade Holdings, based in Beijing, points out that listing in the US can help an Asian company attract the best and brightest talent because it enables a Chinese company to grant stock options for Nasdaq-listed securities, which are highly attractive to employees. He also says a Nasdaq listing enhances a company’s image and reputation because Nasdaq is so well regarded and its listing standards are so stringent.
Sam Qian, president and CFO of Beijing-based China Finance Online Company, which went public on Nasdaq in 2004, agrees. He says the ‘prestige’ of a Nasdaq listing is what led his company to list in the US.
Asian technology firms are flocking to the US, and the stars in the group have been known to triple or quadruple their share price on the day their IPOs launch. Such early triumph can prove a curse, however. Executives need to recognize the importance of regularly meeting institutional investors, something the leaders of the premier IPOs don’t always focus on, especially when their judgment is clouded by astronomical valuations.
Seizing the moment
How the stock price performs in an IPO depends on how well a newly public company can tell its story. The market is naturally eyeing Baidu.com, which listed on Nasdaq in early August at $27 per share and closed that day at $122. Baidu.com, often referred to as ‘the Google of China’, has the kind of catchy hook that appeals to investors, says Franki Lai, head of JPMorgan’s Asia-Pacific ADR sales team.
Similarly, China Finance Online describes itself as China’s cross between Bloomberg and Dell, according to Qian. Like Bloomberg, the company specializes in providing financial information and boasts the most popular web site of its kind in China, with 3 mn daily visitors and 2.5 mn registered users. Unlike Bloomberg, which has numerous offices and employees worldwide, China Finance Online depends solely on the internet for distribution and so has a direct sales model more like Dell’s.
A Nasdaq ticker symbol can be useful when communicating a story. When 51job, a Chinese internet employment site, went public, for example, its trading symbol was the memorable JOBS. Similarly, Ninetowns, which is seizing the niche market of electronic services for importers and exporters in China, is known on Nasdaq as NINE.
The problem is that a company’s story has to be told succinctly. ‘When you go on a roadshow, how much time do you get?’ asks Tse. ‘Maybe half an hour – so you need to convince a group of people in the first 20minutes.’
Happily, many have found that language is not necessarily a serious barrier to telling their stories in China. For companies like Ninetowns, which Ho describes as serving the B2G – or business-to-government market – the greater challenge can be explaining the intricacies of the Chinese market to American investors. In China, for instance, a slew of customs documents needs to be filed before a product can be imported or exported. In order to explain the significant role Ninetowns plays in making these transactions more efficient, investors need to understand some of the bureaucratic obstacles Chinese companies face during the course of a business transaction.
Best foot forward
The roadshow is a vital part of the listing process. And time is of the essence, as underwriters meticulously plan roadshows to maximize their coverage in the limited hours they have. For Asian companies, major destinations typically include Hong Kong, London, New York and San Francisco, with optional detours to such destinations as Boston, Edinburgh, Frankfurt and Singapore.
At the end of a roadshow, the company and the underwriters usually have a good understanding of the level of interest in the offering. And it is not until after the roadshow ends that the offering price is finalized.
After the IPO, though, a company shouldn’t slacken its IR activities. ‘For companies that successfully list on Nasdaq, the roadshow is just the first step,’ says Tse. ‘To succeed, they will have to compete with international companies for investment capital and investor attention, as well as research coverage. And they will have to continue to learn from global best practices in IR.’
Ho agrees. ‘We’re constantly in talks with fund managers,’ he comments. ‘Because we’re in China, we’re not physically located close to our investors, so we need to continue to attract their attention. As a newly listed company, our developments may be overlooked by many larger institutions – so we have to make more effort to let people know what we’re doing.’