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The Zacks Analyst Blog Highlights: Google, Twitter, Facebook, JD.com and SINA

Zacks Equity Research

For Immediate Release
Chicago, IL – July 09, 2014 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Google Inc.  (GOOGL-Free Report), Twitter Inc. (TWTR-Free Report), Facebook Inc. (FB-Free Report), JD.com, Inc. (JD-Free Report) and SINA Corp. (SINA-Free Report).
Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Tuesday’s Analyst Blog:

Alibaba and the Chinese IPO Advantage

Alibaba Group Holding Ltd’s U.S. IPO is probably the most eagerly awaited listing in recent times. The Chinese e-commerce major is valued between $150 billion to $200 billion according to recent estimates. The NYSE will now absorb Alibaba instead of the Nasdaq.

The company is expected to list its shares under the ticker symbol “BABA.” This will be the culmination of a trend where Chinese IPOs are overshadowing domestic offerings.

Defying Market Trends

In May, Alibaba filed a nominal IPO offering of $1 billion, but the final offering is believed to be much higher. The proceeds from the latest multi-billion IPO deal are expected to exceed $15 billion. After Google Inc.’s  (GOOGL-Free Report) and Twitter Inc.’s (TWTR-Free Report) IPOs that raised $1.9 billion in 2004 and $2.09 billion in 2013, respectively, Alibaba is expected to be the next largest Internet stock in the U.S. market, close to Facebook Inc. (FB-Free Report), which earned about $16 billion in 2012.

However, what is particularly significant is how such offerings have defied prevailing market trends. During the last quarter, JD.com, Inc. (JD-Free Report) went ahead with its IPO despite the downturn experienced by Internet stocks. The listing went forward despite the fact that other tech companies delayed their IPOs.

Probably the only reason working in JD.com’s favor was that it was a Chinese company. Ultimately, the Beijing-based firm mopped up $2 billion from its IPO in May. This was another sign, probably the most telling one, that U.S. investors were picking Chinese IPOs over domestic offerings.

The China Advantage

According to data compiled by Bloomberg, China-based companies have raised $3.5 billion from U.S. IPOs in the second quarter. This is the highest such figure since the last quarter of 2007 calendar year. And the Alibaba IPO is expected to outshine all IPOs ever launched in the U.S. markets.

Additionally, Chinese companies garnered 63% of funds accrued by Internet and other tech IPOs launched in the quarter ending June. Till now this year, U.S.-based companies which sold new shares have gained more than 20%. In comparison, their Chinese peers have increased 33% after their U.S. listings.

Internet Boom

According to official data, there are 618 million Internet users in China. By 2015, these numbers could grow beyond the 850 million mark. McKinsey & Co. projects the online retail market in China will be worth $395 billion by 2015. This is around three times larger than its size in 2011.

This is the most significant underlying reason for the success of these IPOs. Since such companies also offer higher returns, investors have found them more attractive than their U.S. counterparts.
It comes as no surprise that the 10 Chinese companies which listed in the U.S. included micro-blogging platform Weibo Corp., a subsidiary of SINA Corp. (SINA-Free Report) and Jumei International Holding Ltd., an Internet cosmetic retailer.
Underlying Risks
Investors have also chosen to ignore the risks associated with Chinese investments. In the latter half of 2011 and 2012, funds flowing from the U.S. into Chinese Internet stocks had declined. Disputes over auditing practices, profit warnings and delistings had cooled investor enthusiasm. Distrust intensified when IPOs were stopped by China’s capital markets regulator.
Investigations into cases of financial misdemeanors followed, after which investors switched to U.S. options. But investors have now chosen to ignore such risks, focusing on the growth which these stocks offer.
The Trouble with VIEs
The fact that Chinese stocks listing on U.S. exchanges structure themselves as variable interest entities, or VIEs, is a major cause for concern. This is done in order to bypass Chinese governmental restrictions on foreign ownership in important industries.
The mechanism used creates a series of complicated legal contracts to allow foreign markets to invest in Chinese companies. A Congressional committee report released last month believes that this is a major risk for shareholders.
The report believes that there is a “high probability” that Chinese courts will not honor the contracts which create such structures. The committee believes the U.S. government should hold discussions with its Chinese counterparts on measures to eliminate such risks. This involves the removal of restrictions on financial markets and the Internet in China as well as clearing the air about the legal sanctity of VIE structures.  
Alibaba Holds the Key  
In fact, Alibaba decided to list on the NYSE only after regulators in Hong Kong refused to change regulations which give them the advantages of a U.S. listing.  The performance of this IPO, itself a culmination of a prevailing pattern, will determine the future of Chinese IPOs in the U.S. If the IPO is successful, it will increase investor confidence in such offerings.
On the other hand, a disappointing performance will snap a trend of successful listings. But the success of JD.com indicates that Alibaba’s IPO would probably be a resounding success. The stock has increased more than 30% since its U.S. listing on May 21. It seems that IPOs from China will continue to be the markets’ favorites in the months ahead.

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

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