IPOs: Lee Kai-fu’s Innovation Works Eyes China OTC Listing

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Bottom line: Innovation Works’ China OTC IPO plan shows the year-old small-cap board is rapidly becoming a popular place to list for money-losing companies that might have previously gone to New York.

Innovation Works files for China OTC listing

China’s year-old over-the-counter (OTC) market is suddenly becoming the hot place for new listings by young tech firms, with word that the technology incubator founded by Google’s (Nasdaq: GOOG) former China head has become the latest in a recent string of companies to file for listings there. The OTC application by Innovation Works highlights a new path to market for money-losing Chinese companies that might have previously chosen to list in New York.

The main stock exchanges in China and Hong Kong don’t allow money-losing companies to list, with the result that many private start-ups used to go to New York where profitability isn’t a requirement. But New York investors are also increasingly showing lack of interest in money-losing Chinese firms, causing their shares to languish and some like online video site Youku Tudou (NYSE: YOKU) to sell themselves and de-list.

The China OTC also looks attractive to some of these Chinese companies because it gives them a path for moving to one of China’s main boards in the future if and when they become profitable, which is their ultimate goal. That appears to be the path being sought by recent money-losing high-profile names to list on the board, including online wine seller Jiuxian, online classified ads site Baixing and the soccer club co-owned by Alibaba (NYSE: BABA) and real estate developer Evergrande (HKEx: 3333).

Now that growing club of names has been joined by Innovation Works, which has formally filed to make an OTC listing, according to media reports. (English article) There’s no word on time frames in the company’s filings, but media reports say the listing would typically occur within the next 6 months.

Innovation Works also has yet to file any information about its profitability, though I do expect the company is probably losing money. Otherwise it would have probably filed for a New York listing, since the Taiwan-born Lee Kai-fu is quite well connected in the US through his previous positions as a senior executive at both Google and also Microsoft (Nasdaq: MSFT).

Incubating Tech Start-Ups

Innovation Works is a relatively successful high-tech incubator, providing office space, funding and other resources for promising start-ups out of its main campus in Beijing. The company has $500 million worth of assets under management, and the various companies it has invested in are worth more than $2 billion collectively. Some of its higher profile investments include photo app maker Meitu and app search engine Wandoujia.

Lee’s decision to list on the low-brow OTC is mostly financial, since his company probably wouldn’t get valued at more than $200-$300 million and it’s also most likely losing money. But there’s also probably a certain political element to his decision, since Lee is trying to rebuild his reputation in China following a period of stormy relations with Beijing.

That period began when Lee was at Google, which in 2010 abruptly shuttered its China search engine in a high-profile dispute with Beijing over censorship. Lee left Google shortly before Google’s China withdrawal, and went to open Innovation Works. But then he started becoming a bit too outspoken on his microblog, which boasts millions of followers, and in 2013 abruptly left Beijing after disclosing he had been diagnosed with cancer.

Lee made a quiet return to Beijing earlier this year, and has been keeping a relatively low profile ever since. Thus a decision to list his company at home would send a signal that he supports China and its efforts to improve its financial markets, and intends to focus on his business and stay out of politics. At the end of the day, Innovation Works and the others to list on the OTC won’t get very much visibility on the market due to its low-profile.

But OTC companies that can manage to become profitable should be able to move to some of China’s larger boards more easily, and probably will do so after they meet the stricter listing qualifications. That in turn will provide more mainstream Chinese investors with a chance to buy into promising homegrown companies that used to always go to New York.

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