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After scandals, Chinese firms again test U.S. waters

By Juwai, 08 March 2012
After a six-month hiatus, Chinese companies are lining up again to raise money on U.S. stock markets, seeking to regain investors' faith with some big-name backers and more transparent disclosure policies. Rachel Armstrong reports for Reuters. March 7, 2012 -- Five China-based firms have made public offering filings with the U.S. Securities and Exchange Commission (SEC) in the past six weeks, aiming for the first listings since Tudou Holdings Ltd, a Chinese online video company, made its debut last August. Lawyers say several more are waiting to see if investor sentiment has recovered after a spate of accounting scandals hit Chinese companies last year. "The pipeline is strong, as there are a lot of companies that have been waiting for some time for a favorable market to list," said Alan Seem, a capital markets partner at Shearman & Sterling in Beijing. Before this week's dip, the S&P 500 index had gained 28 percent in the last 5 months, the Nasdaq 30 percent, and the BNY Mellon index of leading Chinese American Depositary Receipts 27 percent. The current crop of Chinese candidates is not taking any of the short-cuts used by many of those that tested U.S. markets before. All are going for a full IPO rather than reverse merger, and are bringing in heavy-hitter auditors and underwriters. Goldman Sachs is working on three of the deals, while all five have auditors from the Big Four international accounting firms. "The companies we work with are aware of the backdrop of recent allegations, and they don't want to be lumped in the same bracket, so they work very hard to raise their corporate governance and internal controls," said James Lin, a partner at Davis Polk & Wardell law firm in Hong Kong, which is advising two of the companies. Red flags That doesn't mean these companies claim to be without any of the issues that could raise red flags with potential investors. Internet advertising company AdChina, which hopes to raise $100 million, discloses that it is ineligible to hold a licence for providing advertising services in China. It relies instead on contractual arrangements with other companies that do, although it holds no equity in those firms. Car hire firm China Auto Rental, aiming to raise $300 million, disclosed that it has received $144.3 million in loans from an unlicenced lender. The three other companies, Vipshop Holdings Ltd, Cloudary Corp and Newsummit Biopharma Holdings, all report at least one material weakness in their internal accounting units. Tougher questioning from the SEC has led to companies making fuller disclosures in their listing applications, along with concerns that a failure to be up-front from the start could lead to bigger problems later down the line. Short-selling research house Muddy Waters was prominent last year in delving into Chinese companies' accounts and operations to unveil alleged fraud. No-one will want to make themselves an easy target this time round. "It's important for companies to get those Muddy Waters reports and look at what types of issues the short sellers are citing in support of their attacks," said Shearman & Sterling's Seem. Tough questions Investors, too, will be asking more questions of company management. Last year's scandals didn't just hurt retail investors. Billionaire hedge fund manager John Paulson said his fund's investment in Muddy Waters target Sino Forest cost his investors some $105 million. "Investors that have stayed in the space are visiting China more often, meeting with management, visiting company facilities and talking to suppliers and customers more frequently to ensure their investments remain compelling in both the short- and long-term," said William Zima, co-head of Asia and emerging markets at investor relations firm ICR. Derrick Sun, an analyst of mid-cap and small-cap Chinese companies for BNP Paribas, said most investors are focused on Chinese stocks in the Internet, education and healthcare sectors. "New IPOs in these categories will do reasonably ok, but companies outside these sectors, especially small caps, will probably still face a tough time," he said. The hope for Chinese issuers in desperate need of capital is that a strong performance by the first few companies to test the waters will pave the way for more to follow. "Everyone's waiting for a high quality Chinese company to go public this year and do well in after-market trading. That will create momentum and open the door for more," said Davis Polk's Lin. Tudou shares last traded at below half the $29 IPO price.