KE Holdings Inc. China made its first initial public offering on Thursday to raise $ 2 billion from a U.S. listing since iQiyi Inc., then saw its shares rise 87% at closing.
Less than an hour later, iQiyi gave a stark reminder of the rocky road that many new Chinese stocks have walked on American exchanges. Looking at everything is the possibility that all Chinese companies would soon have to choose between enforcing their country’s laws or allowing American investors a greater look at their finances.
a current company often called China’s Netflix, announced that the Insurance and Exchange Commission was investigating allegations that it was inflating user numbers, revenue and other metrics, and shares plunged into a 12% drop in after-hours trading. IQiyi said it has hired “professional advisers” and has launched an internal investigation.
IQiyi went public in March 2018 with $ 18 a share, and has largely stayed higher than that level in public markets. It fell below this past April, though, when Wolfpack Research, a short seller focused on Chinese IPOs, released an alarming report about alleged iQiyi inflated numbers. Dan David’s firm based its report on person surveys in iQiyi’s target demographics, credit reports for all relevant entities and holding companies, and data from two Chinese advertising agencies with access to eQiyi data.
This tale feels very familiar to American investors in Chinese stocks. Not long before Wolfpack’s iQiyi report, Luckin Cafe Inc. LKNCY,
called China’s Starbucks, mired in similar allegations of oversupply. Luckin has now lost 94% of its value, and the stock has been wiped out by the Nasdaq and is now trading over the counter. However, Luckin was not the first company to pull wool over the eyes of investors. According to Stop The China Hustle, a website created by Geoinvesting to draw attention to the issue, U.S. investors have been fooled by more than $ 50 billion from Chinese publicly traded companies listed on the NYSE or Nasdaq over the past 10 years .
More from Therese: Cafe Luckin Warning Tale
While Chinese IPOs are required to submit financial statements and other corporate records to the SEC, they are extremely risky for investors. These companies have complex business structures created to avoid disputes from investors and the consequences from the Chinese government, which prohibits foreign investment in certain types of Chinese companies, including technology firms. Moreover, their audit firms do not have access to what are called company working papers, so they can only conduct their own audits based on materials provided to them by company executives.
The Chinese deal has begun to get attention in Washington, with the Senate passing the “Responsible Foreign Companies Act” in May. But the current heavy-handed approach, which seeks to de-list companies that do not allow audit inspections after three years, would actually further hurt American investors. Moreover, as relations between the US and China continue to deteriorate, recent legislative efforts have been described by some experts as an attempt to advance foreign policy under the guise of securities laws, according to researchers at the Cato Institute. a thought institution in Washington.
Read also:Washington is finally paying attention to Chinese IPOs, but Wall Street can pay the price.
Yet nothing stops the ongoing parade of Chinese companies on Wall Street. According to Renaissance Capital, which tracks IPOs and manages IPO ETFs IPOs,
18 Chinese companies, including EC Holdings BEKE,
, have gone public so far this year, raising $ 5.5 billion, excluding control companies (yes, China is getting involved in them too). That compares with 13 deals that raised $ 2.7 billion in the same time frame last year. So far this year, Chinese companies have already raised more before the full year of 2019, when 25 companies raised $ 3.5 billion, according to Dealogic.
See also: CEO who made one of Silicon Valley’s worst acquisitions wants $ 400 million empty check
Investors may not get enough initial Chinese public offering. Since they lost the boat on real Netflix and many other hot tech companies in the US, they hope to catch up with a copycat company with an even more massive market in China. But as long as these companies are kept to the same accounting standards as American companies, they will always be at higher risk because it is easier for executives to create or fabricate numbers with fewer safeguards and guards. Investors need to be aware of the big risks.