Investors use bonds to enter the China internet sector. Now, U.S.-listed firms are in a fund-raising frenzy. Is the time right? Breakingviews’ Peter Thal Larsen expresses his doubt to Reuters’ Tara Joseph…
All That Glitters is Gold
Tara Joseph says: “Maybe we should just call it the Chinese Internet sector gold rush, Peter. Two Chinese U.S.-listed firms, Vipshop and YY, both seeking convertible bonds and it adds up to about U.S. dollar $1-billion worth.”
Peter Thal Larsen says: “Well that’s right, Tara. And there’s going to be more to come, as well, if the information we’re getting is correct. And really, our view on this is that this, kind of, shows you the enthusiasm – the incredible enthusiasm – in the States for anything to do with Chinese Internet.
“There’s been this huge rally in these stocks, and people are now willing to buy bonds which pay, actually, a relatively low rate of interest for which are convertible into shares in these companies at quite big premiums to where they’re trading at the moment. And it’s really just all part of this Chinese Internet frenzy in the U.S. And at the same time, these Chinese Internet companies at home, trying to raise cash to kind of stock up their war chests and try and stake out some territory in this incredibly fast-growing environment.”
China’s Internet Boom: Sprinter or Long-Distance Runner?
Tara Joseph says: “And of course we have the mother of all Internet listings for China in the U.S. – Alibaba – coming up, so there’s some air with that as well, but in terms of the frenzy, and the amount that they’re raising, you’ve got to wonder how long this is going to last.”
Peter Thal Larsen says: “Investors are very enthusiastic about anything sort of to do with Chinese Internet, and they’re also quite keen on these convertible bonds. So that allows these companies to get low interest rates on the bonds and high conversion premiums, which means they only convert if the rally continues. But at the same time there’s also sort of a push factor from China, which is that these companies really – they see this rally isn’t going to necessarily last forever, and some of them are kind of, not necessarily profitable, still awaiting cash…”
Get in While You Can
Peter Thal Larsen says: “We’ve seen a lot of Internet companies out spending money. So they’re thinking, let’s fill up the coffers while we can, get some cash onboard. We won’t necessarily tell people what it’s for at the moment, but then we’ll have some cash that we can deploy at some point in the future if we see investment opportunities coming along. Especially if the fundraising window closes for other companies.”
Tara Joseph says: “Nice to have a good pile of cash there. The Chinese Internet frenzy rolls on with convertible bonds [as] the latest plan.”
Bottom line: Bonds are the new gateway to China’s internet gold rush. As investors scurry into the market, only time will tell when this season comes to an end.