China IPO frenzy returns — but not in China

By Wei Gu
September 29, 2010

China is no longer blindly in love with new stocks, as seen in this week’s flop of Ningbo Port. But other markets have caught the fever. Four Chinese companies rose on average around 50 percent on their debut in New York and Hong Kong in the past week. Cash-rich global investors are hungry for China’s high rates of growth. A flood of new supply may test their appetite.

The excitement over the latest crop of overseas-listed China stocks is reminiscent of recent years’ booms on the Shanghai and Shenzhen markets. Children’s clothing maker Boshiwa <1698.HK>, and restaurant chain Country Style Cooking , rose by 41 percent and 47 percent respectively on their debuts. On domestic markets, the story is very different. China’s third-largest port operator fell 4 percent on September 28, its first day of trading.

Global investors are chasing Asian growth. Asian equity funds, excluding Japan, had their best week of inflows in more than 15 months for the week ended September 22, according to fund tracker EPFR Global. Consumer-focused stocks, like Boshiwa, are particularly hot, as Chinese politicians air their promises to rebalance the export-led economy toward consumption.

China’s urbanization and rising income levels have even made old themes suddenly sexy. Country Style Cooking, which specializes in quick meals for less than $3, wants to expand from a regional chain of 100 outlets to the whole nation. McDonald’s, for example, has about 1,100 outlets in China.

But high expectations are baked into these prices. Country Style traded at as much as 52 times 2009 earnings by the end of its exuberant first day. Boshiwa was at 53 times its forecast 2010 earnings. Those valuations make their mainland-traded counterparts look positively cheap.

One reason for the exuberance — scarcity value — may be short lived. Global investors are bracing for a record year in equity offerings, including $33 billion out of China, according to Citi. While the likes of search engine Baidu have soared, countless other former darlings of overseas-listed China stock booms now languish, unloved and forgotten. The new generation may not be much different.

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