Benjamin Wey in the News
Chinese Stocks Over-Valued?
Chinese companies are flocking to the Unites States in an attempt to capitalize on the recent widespread interest in Asia’s burgeoning economy; however, some analysts are warning that Chinese Initial Public Offerings (IPOs) are reaching dangerous heights, having been valued well above their worth by over-zealous investors. If new listings continue to draw the same widespread interest that characterized the latter half of 2007, Chinese IPOs may form a bubble.
In October of 2007, the issued capital stock of Noah Educational Holdings Inc., a leading provider of interactive educational content in China, rose over 40 percent on the New York Stock Exchange in less than 48-hours following the technology company’s IPO. Despite the fact Shanghai’s benchmark stock index fell 0.1% due to concerns about monetary policy and high valuations belt-tightening, Noah’s IPO priced well above its forecasted range, perpetuating the booming trend of new Chinese issues. The week following Noah’s IPO, two more Chinese companies entered the market and experienced similarly strong gains. The outcome many veteran analysts fear is that the stocks are being too richly valued by over-eager investors, but for now, investors will continue to be attracted to the possibility of experiencing long-term revenue growth due to China’s emerging small-to-medium enterprises that have coincided with middle-class growth and increased purchasing power.
Ben Holmes is the publisher of the Morningnotes.com, an equity capital markets research company, and he confirmed the recent economic trend, stating: “China is the fastest growing economy on earth; it has a very rapidly developing middle class who are the consumers of the products these companies provide.” In his research, Holmes found that the Chinese IPOs that have experienced strong growth since their appearance in the global market owe their success largely to the nation’s shift towards product consumerism. According to Holmes’ findings, as long as the middle class continues to develop and consume products, the market will remain stable, despite the unusually high number of IPOs.
In order to keep consumers buying and revenues high, companies like Noah Educational Holdings are continually developing new products, and the company recently unveiled its digitally based line of education products that were designed to be used in conjunction with China’s public school curriculums. The company’s target audience is students between the ages 5 to 19, and according to China Statistical Yearbook, the company’s chosen demographic gives them a potential user base of almost 300 million. Following the company’s strong IPO, Noah’s Executive Vice President Rick Chen affirmed that he expected considerable revenue and net income increases over the next few years. While many of his Chinese competitors chose either domestic or Hong Kong initial public offerings, Chen believed the New York Stock Exchange (NYSE) would give his company the extensive exposure it would need for sustained growth. When asked about his decision, Chen remarked to reporters: “U.S. investors understand our story, and we believe the New York Stock Exchange is one of the most prestigious exchanges in the world, and with the best liquidity.”
In the first three quarters of 2007, 17 Chinese companies, including Noah Educational Holdings, staged United States IPOs, raising more than five times the amount of their Chinese counterparts. According to the financial data tracker Dealogic, the sum totaled a whopping 3.4 million dollars in the U.S., but China’s 3 IPOs only raised 550 million dollars. However, the majority of the stocks issued in the US and China to Chinese companies in 2007 are doing comparably well, averaging returns at about 65 percent since their initiation, and investors have been wise to seize on the opportunities while the stocks were still in the lower digits.
Benjamin Wey, a financial expert on China and the President of investment consulting firm New York Global Group, stated the following about Chinese enterprises: “The Chinese have a lot of liquidity and nowhere to go. The party is just beginning.” Although fewer than 100 Chinese companies have launched IPOs on major American stock exchanges, they are already exhibiting similar characteristics that are making them highly attractive to investors: “strong revenue and earrings growth,” according to Wey. However, other financial analysts are less complimentary when discussing the Chinese market and prefer to err on the side of caution. Ben Holmes, for instance, said this about China: “It is very much like our market in 1999, 2000. It is a bubble market, and when it ends, it will be swift and violent. In the meantime, people are trying to make money hand over fist,” which will only make the market crash harder. Jay Ritter, a finance professor from the University of Florida, had this to say about the market, “Nobody is saying at the current levels these companies are screaming bargain.” He went on to say that both domestic and U.S.-listed Chinese stocks were not that dissimilar in valuation and were trading for as much as over 60 times the company’s yearly earnings. “The high price to earnings ratios are really hard to justify, and the mistake investors make is confusing growth in the Chinese economy with growth in earnings per share of Chinese publicly traded companies,” Jay Ritter clarified. Since strong economic growth rarely means a boost in company growth, over-valuations does not assist, but rather inhibits, companies from expanding. “Historically over the last century there has been a negative relationship between the per-capita income growth in a country and stock returns,” Ritter commented on the risks that awaited the next six Chinese companies slated for U.S. IPOs in 2007’s final quarter.
Following Noah Educational Holdings’ IPO, Longtop Financial Technologies Ltd., a Chinese technological services company, and Fuqi International Inc., a precious metal jeweler, were slated to enter the market next, with Fuqi expected to raise a total of 58 million dollars, and Longtop, which was represented by Goldman Sachs, to raise nearly 146 million dollars. Ben Holmes predicted rightly that investors would be more interested in Longtop than Fuqi, since the jeweler’s much smaller offering and dire lack of Wall Street representatives would draw limited interest. However, Longtop, being well-represented in addition to being listed on the NYSE, experienced the same enthusiasm for new Chinese stocks as Noah and countless other Chinese corporations. Longtop has been fortunate over the years to enjoy healthy revenue expansion. Beginning in 2005, the company experienced revenue of 25 million dollars, and it increased the following year to 42.6 million dollars. New income slipped a little between the two years, but statistics had little impact on the firm’s resoundingly successful start, as most investors understand like Holmes that “what goes up, must come down.” In the meantime, new Chinese offerings will continue to be profitable, and they will remain buoyant as long as the market remains stable.