Chinese Web firms postpone U.S. IPOs, cite weak markets

SHANGHAI Thu Jul 21, 2011 3:06am EDT

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SHANGHAI (Reuters) - Two Chinese Internet firms have postponed their U.S. fundraising plans due to volatile global markets and after a series of accounting scandals tarnished the reputation of overseas-listed Chinese companies.

Online video firm Xunlei Ltd, in which Google Inc (GOOG.O) has a small stake, said on Thursday it had decided to postpone its initial public offering on the Nasdaq because of stock market conditions. The Shenzhen, China-based company had already delayed the offering in June and was set to raise up to $114 million.

Chinese e-book firm Cloudary Corp, previously called Shanda Literature, will also postpone its fundraising plans due to poor market conditions, IFR, a Thomson Reuters publication, reported.

The decisions come as a slump in global equity markets has forced several companies to postpone or cancel their IPO plans. Contributing to the weak market sentiment are recent allegations that U.S.-listed Chinese companies have used fraudulent accounting to inflate their books as they listed on U.S. exchanges via reverse takeovers.

"Some of those concerns are valid," said Kelvin Ho, an analyst at Yuanta Securities in Hong Kong. "To be fair, when the risk appetite is reducing or valuations are high, (investors) don't want to take that corporate governance risk."

The IPOX China 20 Index .IPCT of Chinese companies that recently went public is down 5.4 percent since the beginning of the month and has tumbled more than 11 percent since reaching a peak for the year at the end of April.

LOFTY VALUATIONS

Cloudary is a unit of Shanda Interactive SNDA.O and provides online literature and e-readers in China. The firm was hoping to raise around $200 million in its New York listing.

On top of the volatile markets, fund managers have been put off by high valuations on several recent Chinese technology and Internet IPOs in the United States.

Chinese social network company Renren (RENN.N) traded at nearly 80 times annualized sales in 2010 when it went public in May, with other internet companies such as Jiayuan.com International Ltd (DATE.O) and NetQin Mobile Inc (NQ.N) also trading at high valuations, analysts said.

"Investors have less risk appetite now compared to the past, it also has to do with valuations. If you look at the first quarter a lot of the new Chinese Internet IPOs had very high valuations," said Elinor Leung, a Hong Kong-based CLSA analyst.

"Now the market is slightly better but (investors) may not be willing to pay for those valuations," Leung said.

Though no issues have been raised on Xunlei or Cloudary, Chinese companies listed in the United States have seen their shares hit across the board by concerns over accounting fraud at some firms. The problems at these firms were brought to light in part by research reports from short sellers such as Muddy Waters.

Ratings agency Moody's Investors Service last week raised warnings about accounting and corporate governance risks at Chinese companies, naming 49 small- and medium-sized companies for potential issues.

Fitch Ratings said in a report on Monday Chinese companies had "widespread weaknesses" in transparency, reporting and control, but those concerns were already incorporated in their ratings.

U.S.-listed Chinese tech heavyweight Baidu Inc (BIDU.O) and Sina (SINA.O) saw their shares plunge in the early part of June after Muddy Waters released a report on Sino-Forest TRE.TO alleging Sino-Forest was involved in accounting fraud. Sino-Forest has denied any wrongdoing.

Baidu and Sina shares have now returned to pre-scandal levels. Neither company has been associated with any accounting or corporate governance issues.

JPMorgan (JPM.N) and Deutsche Bank (DBKGn.DE) were hired as lead underwriters for the Xunlei offering. Goldman Sachs (GS.N) was arranging the Cloudary IPO, with China International Capital Corporation (CICC) also helping to underwrite the deal.

(Additional reporting by Elzio Barreto and Shu-Chen Yang in HONG KONG and Sharma Himank in BANGALORE; Editing by Jacqueline Wong and Lincoln Feast)

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