One of the curious aspects of the recent rebound in the
market is the heavy slate of China-based companies in the mix. It
remains pretty hard for U.S.-based companies to line up a deal, but
investment bankers have had little trouble if the word "China" is
part of the offering.
But bankers may have a hard time lining up more China-based deals
in the near-term. Many of the recent IPOs have traded down after
their debut, even after those debuts often saw a lowered offering
price to make a deal happen. Why the underwhelming performance?
First, Chinese stocks have come under pressure recently as concerns
build that the Chineseeconomy is overheating. Second, there seems
to be little "after-market support." Typically, analysts at a
firm's underwriters tend to talk up a stock once the
is over. Yet investment research support has been scant for many of
these recent China-based IPOs. As a result, many of them are now
down -25% or more form their offering price.
Let's look at each of these five lagging IPOs tospot the best
Mecox Lane (Nasdaq:
Note to the executives at this Chinese retailer and e-commerce
play: "Welcome to the United States, where you pull off anIPO ,
deliver disappointing results, and then get hit with a wave of
vulture-like lawsuits claiming wrongdoing." That happens whenever a
stock takes a big hit, but it must be jarring to foreign firms
Mecox Lane targets young urban female shoppers with a range of
discounted clothes and furnishings through its website and nearly
200 stores. The company recently reached $200 million in annual
sales and is just now profitable. In late November, Mecox reported
third-quarter results and issued fourth-quarter guidance that were
OK, if uninspiring. Investors were a bit spooked by a spike in
expenses that led to gross margins that were a few hundred basis
points below levels seen in previous quarters. Unfortunately, we've
often seen companies that seemingly have great quarters going into
anIPO , and less-than-stellar results soon after it goes public.
Well, investors suddenly wanted nothing to do with the retailer.
And in just a few short months, it has already lost three-fifths of
its value. So is this a lousy company? No, but management now needs
to rebuild credibility, and that will take time. With a few more
quarters under its belt, investors will really get a clear read on
sales, expense andprofit trends. Until then, this stock is staying
in the doghouse.
SinoTech Energy (NYSE:
The ink isn't even dry on the paperwork for this NovemberIPO , and
it's already out of favor. Investors quickly realized that this
provider of oil and gas drilling services is playing a bad hand,
competing against government-owned or government-favored rivals.
And that's not all: SinoTech's deal was priced at a very big
premium in terms of price/sales, and the company is still
SinoTech's technology helps oil to flow more freely through
drilling pipes. The company claims that its patented approach can
boost output and save money. The onus is now on Sinotech to
consistently prove its mettle for a few quarters, butshares are
unlikely to see any rebound before then.
are currently valued at about six times annualized EBITDA, which is
not a low-enough multiple to attract the deep value crowd, unless
this company can move onto a path of high growth.
My colleague Tom Taulli profiled this car-shopping website operator
and noted that BitAuto is growing at a fast clip. [
See his article here
On the heels of the buzz surrounding
IPO , shares of BitAuto traded up above $13 by late November, but
have subsequently pulled back sharply. That may spell opportunity.
This isn't just another ad-based website. Instead, BitAuto looks to
build a steadier and more lucrative business by helping new and
used car dealers with marketing and inventory management. As
Chinese consumers become more sophisticated with their car buying
research, dealers know they'll have to invest in efforts that help
"move the metal."
BitAuto has yet to become consistently profitable, and investors
are unlikely to favor this stock based on its robust top-line
prospects until it can show a path to profitability as well. Based
on current trends, that could come in 2011, and investors will want
to listen closely on the next conference call to get a sense of
whether revenue is rising fast enough to eventually overtake
expenses. Put this one on your watch list.
China MingYang Wind (NYSE:
This broken IPO typifies all that is right and wrong with the
Chinese clean energy sector. Overall industry growth is impressive
as the Chinese government throws massive support behind wind and
solar, but specific companies are reporting very erratic results.
China Ming Yang's rival
A-Power Energy (Nasdaq:
has long vexed investors by posting very strong quarters and very
weak quarters back-to-back. Indeed, guilt-by-association with
A-Power is likely why China MingYang has seen itshares languish in
China MingYang, which makes wind turbines, was in high-growth mode
prior to its IPO. The company wasn't even a player five years ago,
and is now on track for nearly $1 billion in annual sales in 2011.
That revenue base is also now large enough for the company to show
profits. Look for
earnings per share (
of $0.75 to $1.00 in 2011, assuming demand remains stable. Shares
trade for about 10 it 12 times that view.
If this were any industry, torrid growth and a reasonable multiple
would make this a very popular stock. But right now, Chinese stocks
and clean energy are unloved. As is the case with other companies
mentioned here, China MingYang will need to show consistent and
profitable growth before theprice-to-earnings (
) multiple will expand. But of all the companies profiled here,
this is clearly the most stable and meaningful enterprise. And for
my money, if you want exposure to the world's most dynamic clean
energy market (China), then China MingYang is the way to play it.
Action to Take -->
There's no hurry to snap upshares of these broken IPOs. But they
all possess intriguing business models that could help them become
key industry players in coming years.
Of all the companies profiled, China MingYang is clearly the most
stable and meaningful enterprise. And for my money, if you want
exposure to the world's most dynamic clean energy market (China),
then China MingYang is the way to play it. If you are a believer in
the long-term potential of the Chineseeconomy , as I am, then you
need to stay on top of these stocks in the event they start to find
moreappreciation on Wall Street.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.