SAN FRANCISCO -- If you missed out on Baidu.com (BIDU - Get Report), the "Chinese Google (GOOG - Get Report)," before its run-up, keep your eye on the IPO market. There are plenty of other koi in the sea.Just look at Friday's New York Stock Exchange debut, China Digital TV ( STV), which priced at $16 and promptly doubled by midmorning. The company makes software and access cards for customers of pay cable, satellite and terrestrial television service operators in China. While American Depositary Receipts on Chinese companies represent a higher risk, that goes unacknowledged by the market, says MorningNotes' Ben Holmes. ADRs often enjoy unusual upside, especially during the fourth quarter. The fourth quarter in the IPO market is the "mark-up game," Holmes says. Buyers hold on to new issues that rise, at least until 2008, to show the gains on their year-end results. Providing, of course, that they do rise. A look at a few 2006 IPOs is instructive. Mindray Medical ( MR - Get Report) was offered at $13.50 on Sept. 26, 2006 and ended up 30% its first trading day. The stock closed Thursday at $43.05. But then there's Solarfun Power ( SOLF), which went out at $12.50 on Dec. 20, 2006 and plunged 16.9% during its first trading day to close at $10.39. It closed Thursday at $12.80. Solarfun's roller coaster ride demonstrates the risks that Chinese ADRs pose to investors. During the past year, the stock has ranged from $8.22 to $17.69, and is stagnant at 30 cents above its offer price. But for every sob story, there's a first-comer.
In each sector, the first Chinese firm to market has the edge, says Holmes. First-movers tend to fare better than late-comers and also-rans.One such first-mover is JA Solar ( JASO). The maker of solar cells went public for $15 a share back in February. Its lockup period enables insiders to sell their shares in a secondary offering scheduled to trade Oct. 12 at a higher premium of $39.31. But the stock itself is even higher -- up 4.3% Friday to $43.26. The company says it has nailed down a source of silicon wafers, which are in tight demand, that will enable it to meet production needs at least through early 2008. Chinese IPOs tend to come to market very quickly, usually within days or weeks of their initial filings, because they're not subject to Sarbanes-Oxley, Holmes said. And there's the rub: Many Chinese ADRs carry higher risks because their financials don't go through the same vetting process as American companies. Those risks aren't inherent to ADRs, Holmes says, just those representing companies where the regulatory environment is less rigorous about accurate disclosure. Some Chinese prospectuses warn that accounting methods at these companies are deficient, making the reliability of earnings reports more than a little dicey.