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Which Broken Chinese IPO Will Rebound?

By David Sterman of StreetAuthority

NEW YORK ( StreetAuthority) -- One of the curious aspects of the recent rebound in the initial public offering market is the heavy slate of China-based companies in the mix. It remains pretty hard for U.S.-based companies to line up a deal, but investment bankers have had little trouble if the word "China" is part of the offering.

But bankers may have a hard time lining up more China-based deals in the near term. Many of the recent IPOs have traded down after their debuts, even after those debuts often saw a lowered offering price to make a deal happen.

Why the underwhelming performance? First, Chinese stocks have come under pressure recently as concerns build that the Chinese economy is overheating. Second, there seems to be little "after-market support." Typically, analysts at a firm's underwriters tend to talk up a stock once the quiet period is over. Yet investment research support has been scant for many of these recent China-based IPOs. As a result, many of them are now down 25% or more form their offering price.

Let's look at each of these lagging IPOs to spot the best rebound candidate.

Mecox Lane

Note to the executives at Mecox Lane (MCOX), the Chinese retailer and e-commerce play: "Welcome to the United States, where you pull off an IPO, deliver disappointing results, and then get hit with a wave of vulture-like lawsuits claiming wrongdoing." That happens whenever a stock takes a big hit, but it must be jarring to foreign firms nonetheless.

Mecox Lane targets young urban female shoppers with a range of discounted clothes and furnishings through its Web site and nearly 200 stores. The company recently reached $200 million in annual sales and is just now profitable. In late November, Mecox reported third-quarter results and issued fourth-quarter guidance that were OK, if uninspiring. Investors were a bit spooked by a spike in expenses that led to gross margins that were a few hundred basis points below levels seen in previous quarters. Unfortunately, we've often seen companies that seemingly have great quarters going into an IPO, and less-than-stellar results soon after they go public.
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