Attack of the Killer Chinese IPOs

If you think your portfolio took a beating last week, imagine the poor sap who's been buying up China's latest new offerings.

Snapping up Chinese debutantes used to be a no-brainer. Underwriter-vetted upstarts in a country where the economy was growing at a 10% clip against the backdrop of a global recession seemed like easy money.

Well, Joe Q. Youngblood had a rough week.

Let's take a closer look at five of last week's biggest losers.

Source: Barron's.

Everyone was selling these stocks that they couldn't even buy a year ago. Yes, all five of these companies have gone public over the past year.

Volatility cuts both ways
Underwriters didn't have any problem finding willing buyers for these offerings. They were made relatable for stateside audiences. Renren, you see, is China's Facebook. Dangdang is China's Amazon.com. Youku.com? Dude, that's only YouTube in the world's most populous nation!

Investors glossed over the imperfections. It didn't matter that Youku was spewing losses or lacked the market share dominance that YouTube has globally. Roughly 80% of Dangdang's titles were books, making it seem more like a richly priced version of Amazon circa 1996. If you think Facebook has ownership contested issued, Renren's shareholders don't actually own the namesake social networking site -- they're simply contractually entitled to its economic benefits.

Investors didn't seem to care.

ChinaCache -- the Akamai of China, mind you -- went public in October at $13.90. The stock traded as high as $27.15 on its first day of trading. All of these fallen darlings had glorious debuts. Now they're experiencing equally glorious dives.

SouFun has shed 36% of its peak value, and it's the lucky one. The other four stocks have surrendered between 55% to 80% of their value since hitting all-time highs.

Scaling the great wall of redemption
Where did this all go wrong? Is this the mother of all buying opportunities or simply the tip of the iceberg?

There are two things that played a major part in derailing investor interest in Chinese growth stocks. The first knock is the wave of implosions of mostly smallish companies when accounting irregularities creep up. Most of the short attacks have proven unfounded, but -- to some -- buying into China these days is like buying into a minefield at the other end of the planet.

The other blow came from Alipay-gate. Once it became known that privately held Alibaba was able to scalpel away a key subsidiary -- the PayPal of China, yo -- without financially compensating significant stakeholders Softbank and Yahoo! (Nasdaq: YHOO), investors began to feel that they could get hoodwinked, too.

It's not pretty.

When Dangdang went public at $16, only to open at $24.50, CEO Guoqing Li argued that underwriters were favoring prized clients over the companies they were taking public. After all, Dangdang left some serious money on the table if the first open market investors were willing to shell out $24.50 for the Chinese e-tailer.

I wonder how Li feels now that Dangdang is trading for quite a bit less than its original $16 price tag?

It's not just Dangdang. Renren and ChinaCache are so deeply underwater that they may come down with the bends if they try to surface too quickly.

Jiayuan.com (Nasdaq: DATE) -- the eHarmony of China -- went public at $11 last month. It traded as high as $15.80 three weeks ago, but after a 21% plunge last week Jiayuan is another broken IPO heartbreaker.

I can't tell you that the bleeding stops now, but I am fairly confident that at least some of these stocks will be trading higher a year from now. The valuations are just too tempting to ignore.

ChinaCache is now trading for just 24 times this year's projected profitability and 16 times next year's estimate. It's growing a lot faster than that, naturally. If you think China Cache is cheap, SouFun is fetching a mere 14 times this year's expected income and 11 times next year's forecasted showing.

The jury's still out on some of the others. Youku is still several quarters -- if not years -- away from profitability. Dangdang has to prove that it can expand outside of low-priced books and widen its margins.

It's a great time to be a bull in a china shop, even if there may still be some "you break it, you buy it" moments yet to come in the near term.

Are you buying Chinese stocks lately? Which ones? Share your thoughts in the comment box below.