January 14, 2011
Drew Bernstein, Co-Managing Partner, Marcum Bernstein & Pinchuk LLP, Interviewed by International Finance News for Article: Equal Choice Between RTOs and IPOs in the U.S. Stock Market
By Xuan Song
There is both good and bad news in the market for Chinese private companies who are planning to go public in the U.S. stock market. On one hand, the number and the size of IPOs have reached the highest level in history. On the other hand, SEC has started investigations into Chinese RTOs regarding their financial reporting and accounting issues. In the secondary market, the direction of China concept stocks’ share price remains erratic. Given the fast growth of Chinese capital markets, why do Chinese companies still prefer getting listed overseas? What kind of benefits could US stock exchanges bring to China listed enterprises? IFN interviewed Drew Bernstein with these questions.
IFN: In 2010, 34 private Chinese companies went public in the U.S. market for a combined total value of $3.73 billion. Why are more and more private Chinese companies going public in the states?
Drew Bernstein: To clarify, the $3.7 billion is only a part of the financing amount of U.S.-listed Chinese companies. There are many Chinese companies who went public in the U.S. through RTOs, which have not been included in the $3.7 billion. In total, the financing amount raised by Chinese private firms should be more than $4.0 billion.
In the past several years, many Chinese private firms went public in the U.S market through RTOs instead of IPOs. However, due to the recent rumors and scandals in the China RTO space, Chinese firms start to think going public through RTOs may have a negative impact on its reputation.
On the other hand, the Chinese economy has been recovering quickly. The Chinese capital market is also very dynamic. Both of these are highly attractive to U.S investors who are very interested in investing in high-growth Asian companies.
IFN: What are the key issues of SEC’s investigation on Chinese RTOs?
Drew Bernstein: First of all, both RTOs and IPOs are methods to get listed in the States. The methods themselves do not have good or bad nature.
The main reason for the SEC’s investigation is that more Chinese private companies go public in the U.S. market through RTOs. But normally and technically speaking, the problem with RTOs is related to the shell company. It is not necessarily the Chinese company’s issue.
There are many good public U.S companies that have gone public through RTOs, which indicates that an RTO is not a problematic process.
However, many Chinese companies used to mispresent the financial numbers. When they get listed in the States, they may exaggerate revenues and net incomes to attract investors. Although it is the management who decides to do the wrong thing, it is the auditor’s duty to identify the false reporting. But sometimes smaller accounting firms do not have the capabilities to do so because they lack the relevant skills and a deep understanding of the cultural and language differences between China and the U.S. That may partially explain the reason for the SEC’s investigation.
IFN: Despite the fact that the number and the size of IPOs have reached the highest level ever, some China stocks are heavily undervalued. What’s the reason? What are the key indicators when US investors evaluating China concept stocks?
Drew Bernstein: The U.S media has written articles on this issue. They think US investors originally give China concept stocks a premium valuation given China’s fast growing economy. However, after several years of trading, government regulations’ uncertainties contributed to the risk discount put on China concept stocks.
In addition, mispresenting financial numbers remains a big problem in the China space, which increases the risks and decreases investors’ interest in China stocks. This is another contributor to China stocks’ performance in the U.S. markets.
However, after the economy crisis in 2008, U.S. investors are now more actively seeking new investment opportunities. Their risk preference has changed. There is no doubt that China has become a good place to invest, but it’s also not easy for U.S investors to invest in Chinese companies directly. The stock market provides a good bridge for US investors and Chinese concept stocks have become one of the best choices for now.