KE Holdings Inc. Thursday became China’s first public offering to raise $ 2 billion from a US listing since iQiyi Inc.
Less than an hour later, iQiyi issued a stark reminder of the thorny path many young Chinese stocks have taken on US exchanges. Flipping things over is the possibility that all Chinese companies may soon have to choose between complying with their own country’s laws or allowing American investors to have a broader view of their finances.
a streaming company often dubbed China’s Netflix, has announced that the Securities and Exchange Commission is investigating allegations that it inflated user numbers, revenue, and other metrics. and stocks are down 12% in after-hours trading. IQiyi said it hired a “professional advisor” and started an internal investigation.
IQiyi went public in March 2018 for $ 18 a share and is still largely well above that on the public market. However, it fell lower this past April, when Wolfpack Research, a short-seller focused on Chinese IPOs, issued an alarming report on the numbers believed to have blown. swelling of iQiyi. Dan David’s company is based on their report of direct survey of people in iQiyi’s target demographics, credit reporting to all related organizations and parent companies, and data from two companies. Chinese advertising agency has access to iQiyi data.
That story was all too familiar to American investors in Chinese stocks. Not long before Wolfpack’s iQiyi report, Luckin Coffee Inc. LKNCY,
dubbed China’s Starbucks, plunged after similar accusations of overblowing the numbers. Luckin has lost 94% of its value and the stock has been delisted on the Nasdaq and is currently traded over the counter. However, Luckin is not the first company to attract the attention of investors. According to Stop The China Hustle, a website created by Geoinvest to draw attention to the matter, American investors have been misled over $ 50 billion by Chinese companies that are publicly traded on the NYSE or Nasdaq. in 10 years ago.
See more from Therese: Luckin Coffee’s cautionary tale
Although Chinese IPOs are required to submit financial statements and other corporate filings to the SEC, they are extremely risky for investors. These companies have complex business structures created to avoid both lawsuits from investors and influences from the Chinese government, which prohibit foreign investment in certain types of Chinese companies, including technology companies. In addition, their auditing firms do not have access to what is known as company working papers, so they can only perform audits based on the documents they are boarding with. company provided.
Chinese deals are starting to gain attention in Washington, with the Senate passing the “Foreign Companies Accountability Act” in May. But the current heavy-handed approach, seeks eliminating the list of companies that do not allow auditing after three years, will actually do more harm to US investors. Additionally, as relations between the US and China continue to deteriorate, the latest legislative efforts have been described by some as an attempt to promote foreign policy under the guise of securities law, according to the study. fake at the Cato Institute, a Washington consulting organization.
Also read:Washington is finally paying attention to Chinese IPOs, but Wall Street could pay the price.
However, nothing prevents the constant parade of Chinese companies on Wall Street. Following Renaissance Capital, which monitors IPOs and manages IPO ETFs,
18 Chinese companies, including KE Holdings BEKE,
, which went public so far this year, raised $ 5.5 billion, excluding the short auditing firms (yes, China is also joining these companies). That compares to 13 deals that raised $ 2.7 billion in the same time frame last year. Chinese companies have raised more cash so far this year than they did in 2019, when 25 firms raised $ 3.5 billion, according to Dealogic.
See also: CEO of one of Silicon Valley’s worst acquisitions wants a $ 400 million white check
Investors clearly couldn’t get enough of the initial Chinese public offerings. Since they missed the boat on the real Netflix and many other hot tech companies in the US, they are hoping to catch up with the momentum from a clone with an even wider address market. in China. But until these companies follow the same accounting standards as US companies, they will always be at a much higher risk because executives easily falsify or falsify numbers with less. More protective and monitoring measures. Investors need to be aware of major risks.