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.

Well, investors suddenly wanted nothing to do with the retailer. And in just a few short months, it has already lost three-fifths of its value. So is this a lousy company? No, but management now needs to rebuild credibility, and that will take time. With a few more quarters under its belt, investors will really get a clear read on sales, expense and profit trends. Until then, this stock is staying in the doghouse.

SinoTech Energy

The ink isn't even dry on the paperwork for SinoTech Energy ( CTE), this November IPO, and it's already out of favor. Investors quickly realized that this provider of oil and gas drilling services is playing a bad hand, competing against government-owned or government-favored rivals. And that's not all: SinoTech's deal was priced at a very big premium in terms of price/sales, and the company is still unprofitable.

SinoTech's technology helps oil to flow more freely through drilling pipes. The company claims that its patented approach can boost output and save money. The onus is now on Sinotech to consistently prove its mettle for a few quarters, but shares are unlikely to see any rebound before then. Shares are currently valued at about six times annualized Ebitda, which is not a low-enough multiple to attract the deep value crowd, unless this company can move onto a path of high growth.


My colleague Tom Taulli profiled this car-shopping Web site operator and noted that BitAuto ( BITA) is growing at a fast clip.

On the heels of the buzz surrounding General Motors' ( GM) IPO, shares of BitAuto traded up above $13 by late November, but have subsequently pulled back sharply. That may spell opportunity. This isn't just another ad-based Web site. Instead, BitAuto looks to build a steadier and more lucrative business by helping new and used car dealers with marketing and inventory management. As Chinese consumers become more sophisticated with their car buying research, dealers know they'll have to invest in efforts that help "move the metal."

BitAuto has yet to become consistently profitable, and investors are unlikely to favor this stock based on its robust top-line prospects until it can show a path to profitability as well. Based on current trends, that could come in 2011, and investors will want to listen closely on the next conference call to get a sense of whether revenue is rising fast enough to eventually overtake expenses. Put this one on your watch list.

China MingYang Wind

This broken IPO typifies all that is right and wrong with the Chinese clean energy sector. Overall industry growth is impressive as the Chinese government throws massive support behind wind and solar, but specific companies are reporting very erratic results.

China MingYang's ( MY) rival A-Power Energy ( APWR) has long vexed investors by posting very strong quarters and very weak quarters back to back. Indeed, guilt by association with A-Power is likely why China MingYang has seen it shares languish in recent weeks.

China MingYang, which makes wind turbines, was in high-growth mode prior to its IPO. The company wasn't even a player five years ago, and is now on track for nearly $1 billion in annual sales in 2011. That revenue base is also now large enough for the company to show profits. Look for earnings per share of 75 cents to $1 in 2011, assuming demand remains stable. Shares trade for about 10 to 12 times that view.

If this were any industry, torrid growth and a reasonable multiple would make this a very popular stock. But right now, Chinese stocks and clean energy are unloved. As is the case with other companies mentioned here, China MingYang will need to show consistent and profitable growth before the price-to-earnings multiple will expand. But of all the companies profiled here, this is clearly the most stable and meaningful enterprise. And for my money, if you want exposure to the world's most dynamic clean energy market (China), then China MingYang is the way to play it.

Action to Take

There's no hurry to snap up shares of these broken IPOs. But they all possess intriguing business models that could help them become key industry players in coming years.

If you are a believer in the long-term potential of the Chinese economy, as I am, then you need to stay on top of these stocks in the event they start to find more appreciation on Wall Street.

This article originally appeared on StreetAuthority.

At the time of publication, Sterman owned no positions in the stocks mentioned.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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