China De-Brief Part III
By David Feldman at 6 June, 2010, 9:18 am
In the last in this series on my recent China trip, I want to briefly touch on the scope of the opportunity in the world’s most populous country, by reprinting, updating and adding a little commentary to a small portion of the China chapter of the second edition of my book,
Reverse Mergers and Other Alternatives to a Traditional IPO (2nd Edition, Bloomberg Press, 2009).
“Not long ago, the PRC Government was extremely concerned about Chinese companies selling ownership interests to foreign companies or going public outside of China. This attitude has thawed dramatically, starting around 2003. Since that time, as China has sought to encourage foreign direct investment in the country, dozens and dozens of Chinese businesses have completed reverse mergers into U.S. shell companies. In 2008 and 2009, Chinese companies constituted about one-third of the total number of companies completing reverse mergers into U.S. shells. That rate has not abated in 2010. Some are skeptical about the China phenomenon. They believe valuations of these companies are much too high and that at some point the bubble will burst. They point to a small number of scam artists who have soured the landscape a bit (including one company that made it all the way to Nasdaq before it was discovered that the company chairman was a totally fictitious person). They also see worldwide concerns about issues concerning the safety of Chinese toys and food. Others suggest we are just getting started, and that there is a seemingly endless supply of exciting, entrepreneurial Chinese companies that want to take advantage of the benefits of a public trading stock. They believe the scam stories are very small in number in comparison to the many great companies that are going public. They point to a fast-growing economy in China, which has slowed recently but is still growing; government support for these efforts; a cheap labor force, which makes these companies highly competitive (this is slowly beginning to change as the economy steams ahead there); and businesspeople who are willing to learn from Western success stories.”
From my vantage point, I believe that issues concerning credibility and such exist everywhere, certainly here in the US. Quality players learn how to work hard to ensure that the people they choose to do business with are legitimate. Each time I visit China I am more excited about what does seem to be a never-ending cavalcade of superb growth companies in a variety of industries. Interestingly, some of the most exciting are happily limiting themselves to only the Chinese market.
On this trip alone I met with easily 10 different companies who are interested in being public. Most of these companies’ biggest problem: as much as they can produce they can sell, they simply do not have the capital to add capacity to their existing manufacturing facilties. This is, as we like to say, a good problem. But as I always tell my staff, a good problem is still a problem. Solution: access capital in the US. As I said before the trip, right now it’s China China China. Next, back to other stuff!
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