The New York Stock Exchange (NYSE) welcomed a flood of initial public offerings from Chinese companies in 2010, and it looks set to repeat the performance in 2011. The exchange is owned by NYSE Euronext, whose portfolio of markets host nearly 40% of the world’s traded equities.
Michael Yang, chief representative of the NYSE’s Beijing office, spoke with China Economic Review about the recent boom in business and whether reverse merger scandals will taint other Chinese listings. Yang worked in private equity and investment banking for more than a decade before joining the NYSE, and participated in listings including New Oriental, E-House China, LDK Solar and Yingli Green Energy.
Q: How many initial public offerings (IPOs) do you expect Chinese companies to conduct this year?
A: It totally depends on the market. The NYSE has had four IPOs from China to date this year, and I think there will probably be around 20 IPOs if the market remains good. Last year there were 22.
Q: What’s behind the recent trend of Chinese tech companies listing on the NYSE rather than NASDAQ?
A: It’s because the NYSE relaxed its listing rules in 2009. Previously, we required companies to have three years of net profit before the listing, or annual sales revenue of more than US$75 million. Only very few technology companies could meet those standards: Giant, Longtop, VanceInfo, this kind of software/IT outsourcing company.
In 2008 and 2009, because of the financial crisis few companies could meet our listing standards. So, after getting approval from the SEC, we changed our listing rules in 2009. Right now, our lowest listing requirement is an IPO offering size of more than US$40 million and a post-IPO market cap of more than US$150 million. Most of the venture capital-backed technology companies can meet these requirements.
Q: What proportion of revenue do IPOs generate for the NYSE?
A: It’s very small. The biggest portion is trading, and also technology services that we provide to other stock exchanges in other countries and to some other financial institutions.
Q: What’s your opinion of the recent reverse-merger scandals?
A: I’ve always thought reverse mergers were not the right way for Chinese companies to enter US capital markets. High-quality, large companies basically do not choose reverse mergers as vehicles to list in the US – most will choose IPOs. Almost all of the Chinese companies that have done reverse mergers are very small. Most of them are not ready to be listed companies.
Q: What’s the biggest problem with the reverse mergers?
A: There are several. The Chinese economy has developed so fast in the past 30 years, and small- and medium-sized enterprises (SMEs) need financing to catch up to opportunities in the market. However, financing vehicles are quite limited in China, and it can be difficult for privately owned SMEs to get financing from banks or investors, either because they are too small or not in an attractive industry. If they’re not qualified to do an IPO either in China or the US, reverse mergers may look like one of the few options [available] to get financing. Second, there are lots of financial intermediaries in China, most from the US. They encourage these small Chinese companies to do reverse mergers. Entrepreneurs could not do financing in the US without these financial intermediaries, and financial advisors could not do so many reverse mergers if there were not so many SMEs demanding capital.
Q: Is it that these companies are too undeveloped to access capital markets, or should some policy changes be made?
A: It’s difficult for SMEs to get financing everywhere. Typically SMEs compete and only the winner gets more market share and higher growth, and then they get financing from the banks and private equity investors, they expand their business, then they can get listed. That’s just the natural evolution of a company.
Q: Do you think these recent scandals are causing investors to be less enthusiastic about investing in Chinese companies in general?
A: The companies doing IPOs and the companies doing reverse mergers are very different kinds of companies. Currently I think investors still distinguish between these two groups. Companies doing IPOs still attract interest from investors, get high valuations and perform very well, because those two groups of companies are very, very different. The key difference lies in the IPO process. IPOs are endorsed by reputable, credible intermediaries, like the big investment banks, Goldman Sachs, Morgan Stanley, Merrill Lynch, the big law firms, and the Big Four accounting firms. The reverse merger companies don’t have this kind of endorsement. The IPO process is actually a difficult process, and only a solid company can go through and reach the finish line, the listing date. If a company has a problem with its legal structure or its financial audit, it cannot reach the IPO date. The process naturally selects good companies to be listed companies. Reverse mergers don’t go through this.
Q: But isn’t it true that some companies conducted reverse mergers to list on the over-the-counter markets, and then later were able to upgrade and list on the NYSE?
A: That’s called a transfer. The company lists on the over-the-counter market first, and if they get bigger they can transfer to an exchange. The NYSE has the highest listing standards and it’s very difficult for an over-the-counter company to transfer. First, the company needs to meet the financial requirement for the IPO. Second, the public float of a company needs to be more than US$100 million. Almost all of the over-the-counter listed companies have a total market cap of less than US$100 million. So there are very, very few companies that have done this.
Q: Have you made any changes to your operations after observing the recent reverse merger scandals?
A: It’s very difficult for reverse merger companies to transfer to the NYSE, so our listings have not been impacted too much by the scandals. But our compliance department will keep watching the situation, and we will strictly review any applications from over-the-counter companies that want to transfer to our exchange.