4 Reasons Chinese Companies Ipo in America Essay

Reasons Chinese Companies IPO in the States Why do so many good Chinese companies go public in inappropriate marts rather than let domestic investors share in the profits of growth? Chinese investors often give up or so why would good companies, like Tencent (0700. HK), Baidu (NASDAQ BIDU) and Sina (NASDAQ SINA), choose to proclivity in the US and Hong Kong instead of on the Chinese A-shares market. There are four main reasons 1. If a Chinese company takes impertinent enthronisation using a VIE structure, it washbowl except disputation abroad 2.Many companies dont wager the strict financial standards for a Chinese inclination 3. mainland Chinas listing care for takes a long period of time and non very transparent, a torturous examination compared with the Statess speedy registration 4. Chinas regulatory agencies perpetually overregulate, rather than letting the market decide 1) If a Chinese company takes opposed investment using a VIE structure, it can only list abroad The core reason is simple. These companies arent at all eligible to listed on the Chinese A-Shares merchandise, which restrict the overseas-funded enterprises severely.To receive foreign investment, a great number of Chinese companies set up a corporate structure called theVIE or Sina structure, because some industries such as inter pull in information & services and financial services are restricted or even prohibited in foreign-funded investment. This structure is especially common for technology companies that raise finance early and often, frequently from foreign investors. State-owned enterprises aside, roughly Chinese companies in the US are not legally Chinese at all. Theyre caiman Islands, British Virgin Islands, etc. ompanies that control Chinese entities. Chinese regulators lease raised the idea of allowing foreign companies to list on the A-Shares Market, but at present thats still speculative. A worry for foreign investors is that the entire VIE structure, which largely serves to circumvent Chinese laws barring foreign ownership, has beencalled into questionby Chinese regulatorsin late(a) months. 2) Many companies dont meet the strict financial standards for a Chinese listing In August 2005, when Baidu (NASDAQ BIDU) listed in US, Chinese asked this very question. Let us review.Baidu didnt evanesce profitability until 2003. When it went public, it had been profitable for just 2 years. The companys profit was only $300,000 (2. 4 zillion RMB) in the quarter prior to its IPO. This is far from the minimum IPO criteria for the Chinese Small and Medium roof A-Shares Market, where net profit in the recent 3 fiscal years must be affirmatory and the sum exceeds 30 million RMB aggregate cash flow from operational activities in the recent 3 fiscal years exceeds 50 million RMB, or aggregate operating revenue in the recent 3 fiscal years exceeds 300 million RMB. Baidu didnt even live up to the standards for listing on the Chinese Growth Enterprise M arket Profitable for the previous 2 years, with aggregate net profits of not less than 10 million RMB and consistent growth or profitable in the previous year, with net profits of no less than 5 million RMB, revenues of no less than 50 million RMB, and a growth rate of revenues no less than 30% over the last 2 years. Nor may capital be less than 20 million in the year prior to the IPO. )Chinas listing process takes a long period of time and not very transparent, atorturousexamination compared with Americas speedy registration Going public is like discharge through a round of torture. In the prolonged process of waiting for review, they have not only to be upset by countless uncertainties, but also incur high costs take away the balance sheet. 4)Chinas regulatory agencies perpetually overregulate, rather than letting the market decide Chinese regulatory agencies are actually most concerned about investors.They fear that investors will buy low- prime(a) stocks and they thereof sp are no efforts to set up strict review processes for IPOs. They are also concerned about investors losing money in the secondary market and therefore set up protection measures like downward(prenominal) limits and upward limits and make adjustments to the IPO rhythm to stabilize the secondary market. But these good intentions only shutdown up leading everybody astray from the originalmarket intention.The quality of companies listed on the A-Shares Market is far from satisfactory, plot of ground most of the companies with the best growth potential and highest returns to investors list abroad. Moreover, the A-Shares Market remains one of the capital markets with the largest fluctuations in the world The conclusion should be fairly simple regulatory agencies should not and cannot be held responsible for a companys quality through an IPO review. The operational risk of a company does not move in lock step with static indicators like financial data. Regulatory agencies should not and cannot be responsible for the luctuations in the secondary market. Fluctuations of the market can never be contained by up or downward limits, nor can the regulator effectively set the IPO rhythm. Chinese companies will continue to list abroad, despite sky-high A-Share Market valuations To be fair, under the elaborate care of regulatory agencies, A-Shares do have their own magic, that is, a super financing power. Especially in the fiery Growth Enterprise Market over the last year, PE ratios frequently shoot up to 100x. Every single listed company has been overjoyed to wee more funds than planned.With such stupid wealthy people circumstances, will companies still want to list in foreign markets? I believe so. Again, there are many companies that will never meet the standards of the A-Shares Market. For growth companies that really desperately need funds, even the listing threshold of the Growth Companies that list abroad dont have to worry that investors will criticize them for a b road definition of misappropriation. For them, tone ending public is not just a one-time IPO sale, but also a sustainable financing platform. In ConclusionTo sum up, the pre-IPO review and post-IPO trading have made A-Shares Market a divers(prenominal) ecosystem from foreign markets. It is hard to say which is better. But companies themselves have preferences. Therefore, I dont think less companies will list in foreign markets despite the high valuations of A-Shares. Its hard to tell if quality Chinese companies will give A-Share investors a chance to invest. Article by SimonFong ( ),Founder & professorship of Snowball Finance, iChinaStocks parent company. The original Chinese article was published in the October edition of The Founder.