Despite a wave of accounting scandals at Chinese companies, a 58 percent majority of capital markets executives at investment banks believe the number of U.S. IPOs from China-based businesses will increase in 2014, according to a new survey by the accounting and consulting firm BDO USA LLP.
When those expecting an increase were asked to identify the most prominent factor for an increase in China-based offerings on U.S. exchanges, 40 percent cited the perception of an improved commitment by the Chinese to meet U.S. accounting and governance expectations, while 35 percent cited Chinese regulators agreeing to provide the U.S. with more access to documents at Chinese audit firms.
Sixteen percent cited an increased investor appetite for risk as U.S. markets approach all-time highs, while 9 percent cited the willingness of Chinese businesses to discount share pricing to offset the perception of higher risk associated with a Chinese IPO.
“In 2013, after a two-year hiatus, several Chinese-based businesses conducted successful IPOs on U.S. exchanges,” said Lee Graul, a partner in the Capital Markets Practice of BDO USA, in a statement. "A majority of capital markets executives are forecasting more of these offerings in 2014 due to the perception that Chinese regulators and potential offering companies are more willing to meet U.S. governance standards and accounting regulations. While we hope this perception is accurate, we would caution investors to tread carefully due to the previous accounting scandals at U.S. listed Chinese businesses that led to the recent hiatus in Chinese offerings."
Not all bankers are sold on more U.S. listings from China. Twenty-five percent of the bankers polled said they believe the number of U.S. IPOs from China-based businesses will stay about the same as 2013, while 16 percent expect the number to decrease.
When asked the main reason why they predict no increase in China-based offerings on U.S. exchanges, the bankers who forecast flat or fewer offerings cited three main factors. Forty-two percent said investors have not forgotten the accounting scandals at Chinese businesses of just a few years ago, while 30 percent said Chinese businesses will continue to avoid U.S. regulations. More than one-quarter (28 percent) believe the U.S. appetite for Chinese offerings will be limited to select Internet/technology IPOs.
Given the previous accounting scandals at U.S. listed Chinese businesses, 92 percent of the investment bankers polled say they subject China-based offerings to a higher level of due diligence when vetting potential offerings. When asked where they focus their increased due diligence of these offerings, 45 percent identified internal controls over financial reporting. Corporate governance structure (25 percent), business risks and how they are addressed (19 percent) and product/sales trends (11 percent) were the other areas cited by the bankers.