If Chinese IPO Booms, This Is a Bubble

If Chinese IPO Booms, This Is a Bubble

There’s something familiar about the Beijing-based online retailer LightInTheBox Holding Co., which plans to price its initial public offering this week on the New York Stock Exchange. Looking at the company’s website reminds me of an old spoof in the Onion about a Chinese factory worker who can’t believe the sheer amount of cheap junk Americans will buy. “Why the demand for so many kitchen gadgets?” the fictional worker was quoted as saying in a 2005 article for the satirical newspaper. “Where do the Americans put them? How many times will you use a taco-shell holder? ‘Oh, I really need this silverware-drawer sorter or I will have fits.’ Shut up, stupid American.” Many of the items break after a few uses, he noted. On the list of “best deals” on LightInTheBox: a “capless short bob high quality synthetic dark brown straight hair wig” for $27.99, and a “cast iron revolver design tattoo gun kit” for $109.99. Kitchen items include a “cool steamship and iceberg shaped ice tray mold” for $3.79. There’s also free shipping on many items of the 220,000 products offered (even the ice tray), but no recognizable brand names — just a lot of knockoffs.

LightInTheBox would be the first Chinese company to list in the U.S. since YY Inc., a Guangzhou company that runs an online social network, in November 2012. Last year there were only three Chinese IPOs in the U.S., compared with 42 in 2010. A big reason for the drop-off is that a lot of Chinese companies with North American stock listings have turned out to be frauds. (For what it’s worth, YY shares have been on a tear, up 163 percent from their offering price.)

LightInTheBox has some of the same red flags as other Chinese companies that blew up, with or without accounting irregularities. While its executive offices are in Beijing, the company that’s actually going public is a Cayman Islands corporation.

Its business relies on contracts with so-called variable-interest entities. The VIE structure, common among Chinese companies with foreign listings, means “Western shareholders risk finding themselves owning shares in a shell company with no assets and no business if the contracts fall apart,” as Paul Gillis, a professor at Peking University’s Guanghua School of Management wrote in a Wall Street Journal op-ed last December.

LightInTheBox has reported $63.5 million of cumulative losses since it was founded in 2007, although it said it made a $2.6 million profit during this year’s first quarter. The company said in its registration statement that it expects to raise about $70 million through the IPO. That assumes an offering price of $9.50 per depositary share, which would give it a market value of about $416 million. The company reported a $4.2 million net loss on $200 million of revenue for 2012.

Risk-factor disclosures like this one foretell problems with quality control: “We source our products from over 2,300 selected active suppliers in China. Some of the products provided by our suppliers may be defective or of inferior quality. Such products may also infringe on the intellectual property rights of third parties.”

Others suggest that the company’s numbers might not be reliable: “In the course of preparing our consolidated financial statements, we have identified a material weakness and other control deficiencies in our internal control over financial reporting.” The weakness “relates to the lack of sufficient accounting personnel for financial information processing and reporting and with appropriate U.S. GAAP knowledge.”

If U.S. investors have an appetite for this IPO, it could be as strong an indicator as any that the stock market is approaching a bubble.

(Jonathan Weil is a columnist for Bloomberg View. Follow him on Twitter.)

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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