Strong IPO lineup on U.S. bourses amid short-selling spat

Two Chinese Internet stocks have seen their shares soar after debuting on U.S. stock markets last week, reaffirming overseas investors' appetite for Chinese stocks amid a high-profile spat between U.S.-listed Chinese companies and short-sellers.

Qunar, an online travel fare website majority-owned by Chinese search giant Baidu, saw its share price nearly double on the first of day of trading on the Nasdaq to close at 28.4 U.S. dollars on Friday. Shares of 58.com, China's answer to Craigslist, rose more than 45 percent after going public a day earlier on the New York Stock Exchange.

The strong performances were in stark contrast to NQ Mobile, whose shares tumbled by as much as 50 percent after short-seller Muddy Waters accused the Beijing-based mobile security software company of lying about its user base and revenue.

The claim sparked a fresh round of sell-offs of U.S.-listed Chinese companies, often dubbed "Chinese concept stocks," making major Chinese tech and Internet stocks the biggest casualty.

However, the week ended on a bright note as investor confidence in China's booming Internet sector buoyed shares of 58.com and Qunar. NQ Mobile also recovered slightly after the company refuted accusations made by Muddy Waters.

"Chinese tech companies are making a comeback on U.S. markets," said Xu Feng, a partner at Shanghai Huarong Law Firm. "Most of these firms are backed by foreign venture capital and going public in the United States makes it easier for early investors to cash out."

With 130 million monthly users and 4.3 million merchants, 58.com is the largest online classifieds distributor in China, giving small offline vendors broader online exposure to customers. It makes money through a membership fee and priority placements from vendors.

Website Qunar.com is the most visited travel website in China, according to a 2012 Nielsen research report Qunar cited in its prospectus.

The fact that the company is still operating at a loss has not quashed interest in its stock and growth prospects. Unlike its domestic rival and also Nasdaq-listed Ctrip that earns commission from each purchase made on its website, Qunar generates most of its revenue through display advertising and charging travel service providers on a cost-per-click basis.

Qunar and 58.com joined Beijing-based online retailer Lightinthebox as the only three Chinese companies to have been listed on U.S. bourses so far this year, a sharp fall from a peak of 40 in 2010.

The slowdown is because U.S. securities regulators have raised the bar after short-sellers such as Muddy Waters uncovered fraudulent activities in a string of U.S.-listed Chinese companies in 2011.

Short-sellers sell borrowed shares in the hope of buying them back at a lower price and earn the difference after returning the shares.

Most of the companies that came under short-sellers' attack landed in the U.S. market through reverse mergers -- acquiring a shell company in the listing country and assuming its stock rights. This backdoor listing path provides companies with a cheap alternative to an otherwise expensive initial public offering (IPO) process subjecting firms to regulator's close scrutiny.

The opaque listing approach and fraud that emerged in 2011 have also implicated international accounting firms operating in China. The U.S.Securities and Exchange Commission (SEC) has brought cases against Chinese affiliates of PricewaterhouseCoopers, KPMG, Ernst & Young and Deloitte for alleged misreporting.

These auditors are caught up in a broader legal conflict between China and the SEC wants accounting firms to submit auditing paperwork to help identify inconsistencies in financial reports of listed companies. Yet doing so could risk revealing sensitive information as Chinese law prohibits unauthorized cross-border transfer of auditing papers.

The exodus of China-based high-tech and Internet firms to seek financing on American shores over the last three years highlights a quandary for domestic bourses. The Chinese stock market is yet to foster a supportive environment for emerging start-ups.

Hu Ruyin, an economist with the Shanghai Stock Exchange, said that Chinese regulators have put too much emphasis on a company's earning ability while largely ignoring a company's compliance in financial reporting when reviewing potential candidates for an IPO.

"If evaluated mostly on their ability to generate profit, few emerging firms stand a chance to pass the IPO screening. Only large companies can qualify," Hu said.

Domestic investors have largely missed the rally of emerging growth companies listed on the other side of the Pacific. Meanwhile, an anemic domestic stock market repeatedly battered by weak economic indicators in the first two quarters and a liquidity crunch in June is anything but ready to meet the fundraising needs of newcomers.

China has put companies' IPO on hold in its domestic stock markets for more than a year, with around 700 firms left in the IPO pipeline. The suspension, imposed by regulators to shore up an underperforming stock market, has forced a flurry of companies to raise capital overseas. Another two Chinese Internet companies, Shenzhen-based online lottery site 500wan.com and mobile app developer Sungy Mobile, have also filed plans for IPO with the SEC.

Yet these will probably pale in the presence of Alibaba. The Chinese e-commerce giant plans to raise 15 billion U.S. dollars on a stock market outside the Chinese mainland next year, with the potential to unseat Facebook as the largest Internet IPO ever.

Analysts say many smaller firms are now scrambling to float their shares before Alibaba comes in and steals their thunder.