A lot of people in China are looking to the Lashou IPO for a gauge on the temperature for China IPOs in the US. People were looking forward to seeing an increased US appetite for China concept stocks.
But as the IPO looks evermore likely to fall through, some will be inclined to conclude that interest in new Chinese IPOs is low. I’m not entirely certain we can go that far, but I do think we’ve learned some important lessons from the Lashou IPO process.
Firstly, there seems to be an increase in the amount of information that the SEC requires about VIE structures.
Previous disclosures have varied a lot in detail, and lacked some fundamental information that investors need to make informed decisions about the risks involved in the investment. Something that has arguably led to a mispricing of companies using VIE structures.
It now looks like the SEC wants to clean this up and give investors the information they need to properly judge the internal risks in the VIE structures.
I think this reform is much overdue and hope we will soon see an overhaul of the disclosures on the IFRS dictated exchanges with regards to VIEs as well (Predominantly Hong Kong and Singapore).
Secondly, there has been a very strong reaction to allegations of potential accounting issues at the company. This is hardly surprising when you consider the sheer amount of accounting frauds that have been uncovered in Chinese companies the last year.
We’ll have to see what comes of these allegations but investors have had their fingers burnt before so they will approach any company with rumoured accounting issue carefully.
In short, any Chinese company looking to IPO in the future had better get their act together on these two fronts before they file, as they are likely to face more scrutiny than before.
However, I think the real reason for the IPO issues might be found in the prospectus itself, rather than in the overall sentiment of the investors.
For instance, the company is operating in an industry where it has literally thousands of competitors, and this has forced the company’s margins down to a fraction of what we see in Groupon, for instance. So the financials themselves probably didn’t excite investors too much to begin with.
More alarmingly, the company’s biggest competitive edge over its competitors, its strong brand name, is in question, as the company does not own the trademark rights associated with it.
This could cause the company to loose the rights to its’ brand name as well as the rights to the website lashou.com, which would likely force the company to rebrand and start over from the beginning.
However, as Jiayuan managed an IPO not long ago under similar circumstances (they didn’t own the trademark rights to their brand either), we must conclude that something has changed.
I would argue, however, that what we’re seeing here isn’t a cooling off in the general interest in China concept stocks. Instead, we’re seeing investors becoming significantly less forgiving when it comes to discrepancies and issues in Chinese companies, but this should not be mistaken for a cooling interest in China as a whole.
We’ll have to wait until we see the prospectus for the rumoured Vancl IPO, and how well it is received by investors before we draw any definitive conclusions. But companies seem likely to face unabated, if more demanding, investor interest.