* No agreement on China valuations - NYSE listings co-head
* Small size, fast growth make Chinese IPOs tough to price
* Wall Street anxious to tap China's growth
By Clare Baldwin and Alina Selyukh
NEW YORK, March 18 Wall Street firms love
underwriting Chinese initial public offerings in the United
States, until it's time to figure out how to price them.
Figuring out the valuation of Chinese companies is
unusually tricky, because the companies may be growing fast but
often have minimal profits. The trouble with valuing these
shares is evident when they start to trade in the open market:
the shares often either soar or plunge.
"There are wide differences of opinion on how much you
should pay for growth," said Scott Cutler, co-head of U.S.
listings at NYSE Euronext.
It's a tough job, but banks are giving it a go because
investors are clamoring for fast-growing companies. As markets
recover from the recession, investors have been switching their
strategies from seeking stable value to hunting for high
returns in growth-focused stocks.
China, expanding and developing at a booming rate, has
produced plenty of options to fit the new profile. Many of the
companies are also Internet startups that copy business models
of successful U.S. peers, which have piqued U.S. investors'
appetite for growth.
Every major Wall Street bank has been active in the space.
But the banks, including Goldman Sachs (GS.N), Deutsche Bank
(DBKGn.DE) and Citi (C.N), have seen huge movements in the
share prices for the companies they take public, according to
data from the past 14 months by Ipreo, which provides capital
markets data and analytic services.
Goldman Sachs, which leads the pack by total proceeds
raised for Chinese companies in U.S. IPOs since the beginning
of 2010, has been struggling as much as any other bank. It has
done eight deals with average first-day gains of 41 percent
since the start of 2010, according to the data.
Those are massive gains by industry standards --
underwriters usually hope that share prices will go up 10 to 15
percent on the first day of trading. That gain is enough to
give a nice boost to the investor that took risk, but not
enough to outrage issuers that are trying to maximize the
proceeds of the shares they're selling.
Deutsche Bank, ranked No. 9 by raised proceeds, has
underwritten three Chinese deals since the beginning of last
year. On average, they have gained 57 percent over their first
day of trading, and were 57 percent above the IPO price after
the first month.
On the flip side, the deals underwritten by Citi, which is
ranked No. 7 by proceeds raised in four IPOs, have posted
average losses: 8 percent in the first day and 17 percent over
the first 30 days.
REGRET AND COMPLICATIONS
Some companies have expressed outrage over how much their
shares soared after they started trading.
E-Commerce China Dangdang DANG.N sold shares in December
that jumped 87 percent on their first day of trading. Chief
Executive Officer Li Guoqing publicly lambasted Morgan Stanley
(MS.N) after the debut for underpricing the deal.
"I regret not giving the share offer to Goldman Sachs," Li
wrote on the microblogging site after the deal. "I'm openly
criticizing investment banks, including Morgan Stanley."
Since then, Dangdang's shares have eased to trade at
$19.12, or 19.5 percent above their $16 IPO price, more in line
with the gains underwriters aim for when pricing an IPO.
Chinese IPOs tend to be small in size, which means their
pricing and performance as a public stock is more vulnerable to
each investor's opinion of its value, said Nick Einhorn, a
research analyst at Connecticut-based Renaissance Capital.
Besides, the very feature that often attracts investors --
booming growth -- makes valuing shares more complicated.
"The faster a company is growing, the harder it is to put a
concrete valuation on it," Einhorn said.
(Reporting by Clare Baldwin and Alina Selyukh. Editing by Dan
Wilchins, Gary Hill)