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IPO dreams dashed amid global turmoil

By Zhou Yan (China Daily)
Updated: 2008-11-13 11:02

Many Chinese IT companies' hopes of hitting the initial public offering (IPO) jackpot have evaporated amid hefty falls in global stock markets in the past few months.

Last month, global stock markets suffered a 20 percent loss, a record monthly fall that saw domestic entrepreneurs becoming more cautious in taking their companies public both at home and overseas.

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Gone with the IPO dream are the hundreds of millions of new capital that venture capitalists and private equity funds once bet on IT companies promising to become cash cows.

Randv.com, a fast-growing IT company based in Zhejiang province, has had to postpone indefinitely its plan to list on the NASDAQ after receiving two rounds of venture capital injections.

The company's listing was originally scheduled for this month.

"We chose to suspend our IPO schedule because we didn't feel that we could get the price we wanted in the depressed market," Randv's CEO Zhou Xiao told China Daily.

Since it was established in 2006, the net asset value of the company has been rising by an average of 10 percent annually, Zhou said.

Randv is just one of many IT companies exercising such caution. According to local media reports, many other fast-growing IT firms in Zhejiang, including Intohotel.com and Focused Photonics, Inc, have also put their IPO plans on hold pending market recovery.

"The decline in stock prices will certainly make IT companies think twice about going to the stock market for funding," said Steve Hodgkinson, a research director at global analyst and consulting company Ovum. "The problem is that the existing shareholders will need to give away much more equity in exchange for shares to raise a given amount of capital."

The number of newly listed companies in Shanghai A Shares was down 67 percent from a year earlier to only four in the first half of this year, according to PricewaterhouseCoopers.

Figures compiled by investment research and consulting firm ChinaVenture also showed that in China's IT sector, which used to be the most active industry in raising funds from the secondary market, there were no single companies in the country going public last month.

Throughout the past 10 months, only 12 IT companies went public, while the number was 17 one year ago.

"IPOs will be a path we must take for capital raising, but the schedule depends heavily on the external conditions in the next two to three years, especially when our orders have been slightly affected since some of our suppliers went bankrupt recently," said a top executive from Hangzhou National Chip Science & Technology Co Ltd, surnamed Zhang.

The coupling effect of crunched liquidity and low return ratio on the capital market has reportedly made many companies shun financing through stock markets and seek alternatives.

"The low price/equity ratio has dampened IPO prices, which are even lower than private equity prices, " said Liu Zhiteng, an investment manager at Blue Ocean Capital (U2ipo), a Shanghai-based investment consulting firm.

Liu added that weak global stock markets have almost failed to function as a venue for raising funds, with fewer venture capitalists willing to buy into IT startups at present.

As of last month, the average premium rate of the first day closing price for 77 new-issued stocks on China's two bourses was 112.54 percent, compared to 194.64 percent for 129 newly listed stocks in 2007, according to the Securities Times.

"The time when Alibaba raised $1.5 billion in its offering has gone," said Zheng Xiaojun, a veteran angel investor and general manager of Allpku consulting company.

Shares of the country's largest business-to-business e-commerce company soared 192 percent on its first trading day on the Hong Kong Stock Exchange last November.

The $1.5 billion funds raised from the stock also made it the largest IT offering since Google went public in 2004.

But its share prices, which once hit a record HK$41.8, plunged to a 52-week low of HK$3.71 on Oct 27, in tandem with the sharp fall of Hong Kong's Hang Sang Index.

"The decrease of fixed-income securities and stock prices have pushed venture capitalists to reallocate their investment portfolio, forcing them to get more prudent when pumping in cash," Zheng said.

China's benchmark index dropped 25 percent last month, making it the largest monthly slide since February 1995.

"The secondary market will be hit harder than primary markets due to the flight of investors to companies with higher quality earnings and lower risk profiles," Hodgkinson said.

Like other investors, venture capitalists are said to be worried about risks and returns.At a time when risks are moving up and returns down, venture capitalists will become more cautious about investing in early-stage IT companies, he added.

"Mergers and acquisitions would take over the traditional role that IPOs used to play as an exit strategy for venture capitalists, with the former apparently costing less now," Zheng said.

"In an economic downturn, IT companies need to be prepared for the upcoming 'winter'. Ideally, they should try to be debt-free, lean on cost structure, and beef up on cash flow and pricing power," said Richard Ji, an executive director of Morgan Stanley Asia.

The financial crisis is not all bad news for China's IT industry, which has been absent of supervision and suffered over-competition, Allpku's Zheng said.

The sector may be reshuffled through the winter and turn healthy when the financial woes pass, he said.