The IPO Buzz: Shakeout

On Sept. 18, ShangPharma, a China-based pharmaceutical and biotechnology R&D outsourcing company, priced its IPO of 5.8 million American Depositary Shares (ADS) at $15 each. The deal came to market with a lot of hype. It was reported to have been eight times oversubscribed and allocations were said to be slim — at best.

 

Sources reported their allocations were, in fact, slim. That was good news.

 

But the deal was priced at $15 per ADS, the low end of its $15-to-$17 filing range. That was puzzling news. “Hot issues” usually are not priced on the low end of their filing range.

 

In a pre-Halloween trick, the IPO opened at $15 per share and tanked. It closed its opening day at $12.75, down 15 percent from its initial offering price. That was one of the year’s sharpest opening-day losses.

 

Nobody had an explanation.

 

On Oct. 28, the month’s last IPO came to town. Le Gaga, a China-based vegetable producer, priced its offering of 10.9 million ADS at $9.50 each. This deal also came to market with a lot of hype. It was reportedly well oversubscribed and allocations, again, were said to be slim — at best.

 

Once again, sources reported their allocations were small. That was good news. The deal had been priced at $9.50 per ADS on the high end of its $7.50-to-$9.50 filing range. That was good news.

 

In another pre-Halloween trick, the Le Gaga offering saw a pre-opening bid as low as $7.50 per ADS. The IPO opened at $9.06 (below its offering price of $9.50), sold as low as to $8.52, and closed its opening day at $11.26 — UP 18.5 percent. That was a pre-Halloween treat.

 

Still, nobody had an explanation.

 

To the gray beards of Wall Street, this was a blast from the past. There were countless times when a banker would price its IPO and drop its syndicate bid — to shake out the “flippers” was the cliché. And the price would sink in the aftermarket. Then the banker would start covering its short position by buying shares in the open market. (The short position came from over-allocations.) By the end of the day, the IPO would close at a premium.

 

This brings us to November’s first week. The IPO calendar has seven deals. They are expected to raise nearly $1 billion.

 

The “pick of the week,” according to investment professionals, is another China-based company:

 

Xueda Education Group (XUE – proposed), a Beijing-based provider of tutoring services for primary and secondary school students, plans to price is IPO of 13.4 million ADS at $7.50 to $9.50 each.

 

Xueda Education, formed in 2001, has about 11,702 employees.

 

For the six months ending June 30, 2010, Xueda Education reported net income of $11.8 million on revenues of $77.9 million, compared with net income of $2.4 million on revenues of $39 million for the same period a year ago.

 

Here’s what people are looking at:

 

TAL Education Group (XRS), a Beijing-based provider of K-12 after-school tutoring services, priced its IPO of 12 million ADS at $10 each on Oct. 19. The IPO closed its opening day at $15 and closed on Friday, Oct. 29, at $17.80 — UP 78 percent from its offering price.

 

TAL, formed in 2005, has about 2,827 employees.

 

For the six months ending Aug. 31, 2010, TAL reported net income of $13.2 million on revenues of $53 million, compared with net income of $9.4 million on revenues of $33 million for the same period a year ago.

 

Investment professionals have expressed concerns about today’s Chinese IPOs, citing last week’s offerings.

 

Wall Street won’t have long to sweat this one out, though. Xueda Education is expected to be priced Monday evening to trade Tuesday morning.