The past two years have been devastating for U.S.-listed Chinese stocks, but the summer of 2013 may have marked the bottom. After a long period of optimism that began with successful technology dot-com IPOs like Baidu (NASDAQ:BIDU) and Sina (NASDAQ: SINA), Cornerstone Research estimates that U.S.-listed Chinese companies lost $26.5 billion in combined market capitalization from 2010 to 2012. As many investors remember from 2011, the sector was crushed under SEC scrutiny and relentless short-selling. However, in just the past few months, signs of rebirth are emerging from the dust of this sector's implosion. The former darling sector that became so despised two years ago may yet offer bargains today.
Since the turn of the millennium, Chinese companies have extracted billions of dollars from U.S. stock markets. Attracted to the U.S. by a regulation forbidding non-Chinese ownership of Chinese Internet companies and further encouraged by American optimism during the Internet boom, more than 600 Chinese companies fled local capital markets and tapped into American wealth via IPOs, reverse mergers, or reverse takeovers, known as RTOs. This influx peaked in 2010, with dozens of RTOs and 41 IPOs in a single year.
Regulators and lawyers, however, had begun taking notice of the massive amount of investment dollars flowing into China from these U.S. listings. Major fraud and accounting problems surfaced in 2011. By the time 2012 had passed, class-action attorneys had filed lawsuits against 70 of these companies. In 2011 and 2012, there were a total of just 17 IPOs.
Superstar investors like John Paulson and Fidelity's Anthony Bolton lost hundreds of millions on one fraudulent Chinese company called Sino-Forest, which filed for bankruptcy after boutique analyst Carson Block exposed it as a Ponzi scheme. Exchanges delisted dozens more U.S.-listed Chinese frauds like RINO Corporation and China Media Express. The SEC accused Big Four accounting firms of violating securities laws in the sector, refusing to produce audit work papers, and obfuscating investigations.
Wealthy investors like Paulson lost millions individually during the sector's meltdown in 2011, but working-class Americans lost billions. Among the biggest shareholders in now-bankrupt U.S.-listed Chinese company Longtop Financial Technologies were mutual funds managed by household names like Fidelity, Janus, and Legg Mason.
The resurgence of late 2013
Two years have passed since the sector imploded, and the dust seems to have fully settled. On May 24, 2013, China and U.S. regulators signed a memorandum of understanding for increased accounting oversight of U.S.-listed Chinese companies. During the past few months, Chinese IPO activity has been picking up, and the few surviving U.S.-listed Chinese companies have begun rallying in an impressive sector rebound.
- Shanghai-based Montage Technology Group (NASDAQ: MONT) has rallied 50% since its $80.2 million IPO on Sept. 27.
- Chinese Craigslist competitor 58.com (NYSE: WUBA) has rallied 111% since its $187 million IPO on Oct. 31.
- Baidu.com's travel company Qunar Cayman Islands (NASDAQ: QUNR) has rallied 76% since its $167 million IPO on Nov. 1.
Chinese IPOs in 2013 easily outnumber and outperform last year's two entries. In addition to the success of Chinese IPOs this year, Forbes and The New York Times have highlighted the resurgence of U.S.-listed Chinese shares during the past few months. Shares of Sina, Baidu and all the above Chinese IPOs have soared this year. Peter Fuhrman, chairman of an investment bank in Shenzhen, China, explained to The New York Times that the hostility of American investors toward Chinese companies is "easing." Likewise, hedge fund manager Paul Conway explained to Reuters that he is encouraged by the discounts available in U.S.-listed Chinese stock prices right now.
China continues growing
Famed investor Jim Rogers announced earlier this month that he's buying mainland China stocks for the first time in five years, claiming the country's government will continue to be "very proactive" fostering growth in domestic equities. His prediction is coming true through an assortment of government-encouraged contract awards, increasing many U.S.-listed Chinese companies' revenue substantially. Recon Technology (NASDAQ: RCON), for example, has announced several new contracts this fall attributable to government infrastructure initiatives, and it is one of many peers to experience large revenue and market-capitalization growth this fall. Indeed, China unveiled a 60-point reform plan on Nov. 15 designed to boost the Chinese economy, further fueling interest in bellwethers like Baidu, which has already rallied 57% this year.
Although the resurgence of U.S.-listed IPOs and RTOs this fall is attracting some press, the trend is still in its early days. The sector certainly has plenty of catching up to do, with the NASDAQ index a stunning 26% higher year to date. Still, American investors are finally reconsidering healthy Chinese companies that were unfairly punished alongside their dubious peers. As regulators and short-sellers have trimmed the U.S.-listed Chinese sector from 600 companies in 2010 to approximately 150 companies today, some fund managers are comfortable calling the bottom as of this past summer.