IPOs: Year-End Rush Fizzles As eHi Skids, Sky Solar Cuts
Bottom line: A year-end rush of Chinese IPOs will include mostly second-tier firms seeking to capitalize on positive market sentiment, leading to weak pricing and delayed trading debuts.
The year-end rush of IPOs that I’ve been predicting has hit a speed bump, with word that one offering set to debut last week has been delayed and a second has been scaled back dramatically. The first piece of news saw car rental specialist eHi (NYSE: EHIC) unexpectedly delay its offering at the last minute, reportedly after the company came under suspicion of submitting false information in some of its earlier IPO filings. Meantime, Sky Solar Holdings (Nasdaq: SKYS) had to dramatically scale back its planned US listing after meeting with lukewarm demand, as it became the first solar panel-linked company to make a US listing in 4 years.
The stumbling of these 2 planned listings highlights the fact that China’s most attractive venture-funded IPO candidates have already completed listings earlier this year, during a window of positive sentiment that opened in late 2013. Now the remaining companies trying to list are mostly second-tier players that would probably never be able to make IPOs in ordinary times. But they are still trying make such listings to take advantage of this year’s bullishness towards Chinese firms.
This year’s positive sentiment has driven stock valuations to astronomical levels, attracting numerous speculative short-term investors who are further driving up stock prices. That means we’re almost certain to see a big pullback in share prices next year as those investors lock in profits. It also means that many of these second-tier companies now trying to list are likely to get little or no interest from serious longer-term investors.
A sign of things to come came in a recent report that shows hedge funds were major investors in Alibaba’s (NYSE: BABA) record-breaking IPO in September. Such short-term shareholders are now almost certainly looking to lock in quick profits they’ve made from their purchases. They could be starting to sell Alibaba shares now, which are down 3.3 percent over the last week after a spectacular run-up that still has them trading 70 percent above their IPO price.
All that said, let’s return to our eHi story, which saw last week come and go without any trading debut for the Shanghai-based car rental specialist. The IPO was supposed to price and make its trading debut on Friday, in a deal expected to raise around $130 million. But none of that happened, and now Chinese media are saying the deal was abruptly delayed after its underwriters and regulators received an anonymous letter from a person claiming to be a company insider. (Chinese article)
The letter claimed to have information that showed eHi had submitted false data related to its operations in earlier IPO filings. The deal’s delay implies that officials believe the letter may be credible, and they are probably asking eHi for clarification. The reports say the debut could happen this week, but the delays could easily last even longer if regulators and underwriters feel insecure about the situation.
Next let’s look at Sky Solar, which had to dramatically scale back its New York IPO plan after meeting with weak demand that saw it cut its fund-raising target by two thirds from an original $150 million to just $44 million. (English article) The IPO late last week made the company the first solar panel-linked company to list in New York since 2010, right before the sector went into a prolonged downturn that is just now easing.
In a slight piece of good news, Sky Solar shares did manage to post a strong gain, rising 13.7 percent in their trading debut on Friday. (English article) Still, the slow start for the listing certainly isn’t good news for the broader solar sector, which has slowly been returning to profitability after the downturn that claimed former giants Suntech and LDK. Despite the weak sentiment, I do expect solar panel makers will continue to see their performance improve as the sector slowly returns to health.
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