U.S. Investors Brush Aside Fears About Chinese Internet Companies

November 7, 2013 Leave a comment

NOVEMBER 6, 2013, 12:06 PM

U.S. Investors Brush Aside Fears About Chinese Internet Companies

By PETER THAL LARSEN

For American investors, love of technology has conquered a fear of China. Shareholders are snapping up shares of Chinese Internet companies going public stateside. It is a striking contrast with the recent past, when accounting scams and poor governance prompted many to shun Chinese stocks. The travel booking website Qunar, which doubled in value on its first day of trading last Friday, is the prime example of the new boom. The same week, shares in the 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 an initial public offering in New York on Tuesday. The online sports lottery operator 500.com and the mobile applications group Sungy Mobile are also preparing to go public.

It is less than three years since a series of frauds and accounting scams cast a shadow over Chinese companies listed in the United States. Valuations tumbled and I.P.O.’s 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 10 times as large.

The latest batch of listings still raises some red flags. Because of Chinese 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 auditing firms, which are not supervised by American accounting regulators.

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

As for all Internet stocks, valuations could prove vulnerable 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.

Filed under TMT Trends

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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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