4 Reasons Chinese Companies Ipo in America Essay

Reasons Chinese Companies initial offering in America Why do so some(prenominal) well Chinese companies go habitual in outside grocerys or else than let internal investors sh atomic number 18 in the profits of harvest-feast? Chinese investors often complain about why would good companies, like Tencent (0700. HK), Baidu (NASDAQ BIDU) and Sina (NASDAQ SINA), choose to magnetic dip in the US and Hong Kong instead of on the Chinese A-shargons food foodstuff. There are quatern main reasons 1. If a Chinese company takes alien investment exploitation a VIE structure, it muckle only list a colossal 2. many an(prenominal) companies dont meet the strict pecuniary standards for a Chinese listing 3. Chinas listing process takes a large period of time and non very transparent, a agonising psychometric test compared with Americas speedy registration 4. Chinas regulative agencies perpetually overregulate, rather than letting the market decide 1) If a Chinese company takes un like 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 marketplace, 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(prenominal) as internet info & services and monetary services are restricted or even prohibited in foreign-funded investment. This structure is especially common for technology companies that raise financing early and often, frequently from foreign investors. State-owned enterprises aside, most Chinese companies in the US are not lawfully Chinese at all. Theyre Cayman Islands, British Virgin Islands, and so on ompanies that control Chinese entities. Chinese regulators have raised the idea of allowing foreign companies to list on the A-Shares Market, but at present thats allay speculative. A wo rry for foreign investors is that the entire VIE structure, which largely serves to misrepresent Chinese laws barring foreign ownership, has beencalled into questionby Chinese regulatorsin recent 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 reach profitability until 2003. When it went public, it had been bankable for just 2 years. The companys profit was only $300,000 (2. 4 one thousand million RMB) in the quarter prior to its initial offering. This is far from the minimum IPO criteria for the Chinese Small and Medium Cap A-Shares Market, where net profit in the recent 3 fiscal years must be peremptory and the sum exceeds 30 million RMB aggregate cash flow from available 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. Baid u didnt even animated up to the standards for listing on the Chinese Growth opening move Market 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 cardinal years. Nor may superior 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 going through a round of torture. In the protract process of waiting for review, they have not only to be disconnected by countless uncertainties, but also incur high cost off the balance sheet. 4)Chinas restrictive agencies perpetually overregulate, rather than letting the market decide Chinese regulatory agencies are actually most co ncerned about investors.They fear that investors result buy low- smell stocks and they whence spare 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 downwards limits and upwardly limits and make adjustments to the IPO rhythm to stabilize the secondary market. But these good intentions only end up leading everybody astray from the archetypemarket intention.The whole tone of companies listed on the A-Shares Market is far from satisfactory, while most of the companies with the outdo 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 st ep 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, down the stairs 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. all single listed company has been overjoyed to get 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 unavoidableness funds, even the listing threshold of the Growth Companies that list abroad dont have to worry that investors will criticize them for a broad definition of misappropriation. For them, going public is not just a one-time IPO sale, but also a sustainable financing platform. In destructionTo sum up, the pre-IPO review and post-IPO trading have made A-Shares Market a different ecosystem from foreign markets. It is hard to say which is better. But companies themselves have preferences. Therefore, I dont think fewer 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 & President of Snowball Finance, iChinaStocks parent company. The original Chinese article was published in the October edition of The Founder.