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Red hot chips

6 November 2013 By Peter Thal Larsen

For U.S. investors, love of technology has conquered a fear of China. Shareholders are snapping up shares of Chinese internet companies going public stateside. It’s a striking contrast with the recent past, when accounting scams and poor governance prompted many to shun mainland stocks.

Travel booking website Qunar, which doubled in value on its first day of trading on Nov. 1, is the prime example of the new boom. The same week, shares in local listings group 58.com – billed as China’s Craigslist – jumped almost 50 percent on their debut. The interest is proving contagious: Autohome, a car-shopping website, filed for a New York initial public offering on Nov. 5. Online sports-lottery operator 500.com and mobile applications group Sungy Mobile are also preparing to go public.

It’s less than three years since a series of frauds and accounting scams cast a shadow over U.S.-listed Chinese companies. Valuations tumbled and IPOs dried up. Even now, just four Chinese companies have listed in the United States this year, according to Thomson Reuters, raising a total of $358 million. Back in 2010, those figures were ten times as large.

The latest batch of listings still raises some red flags. Due to government ownership restrictions, mainland internet businesses can only be listed overseas by setting up “variable interest entities”, which their offshore parents control through contracts rather than direct shareholdings. The accounts of the new listings are prepared by Chinese auditors, which aren’t supervised by U.S. accounting regulators.

Existing ownership offers some reassurance. Chinese internet giant Baidu retains a controlling stake in Qunar while Autohome has been under the control of Telstra, the Australian telco, since mid-2008. Nevertheless, investors seem more interested in buying growth than pricing risk. U.S.-listed internet stocks are up 25 percent since the end of June, and China’s expanding economy and increasingly active consumers are powering revenue.

As for all internet stocks, valuations could prove fragile to increased competition or technological changes. Well known Chinese worries just add a further level of uncertainty. But for now, rapid revenue growth is trumping caution.



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