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Technology

Cramer says homegamers should stay away from the red-hot Chinese IPO market

Initial public offerings seem to be coming back in style on Wall Street, so CNBC’s Jim Cramer wanted to zoom in on one part of the market that caught CNBC’s attention in recent weeks: Chinese IPOs.

“Now, it’s not just that Chinese IPOs have been surging. According to the IPO experts at Renaissance Capital, we’ve had 149 deals so far in 2017, up more than 53 percent from this time last year,” the “Mad Money” host said. “By my count, 11 of those IPOs were for Chinese companies. More important, we’ve gotten nine Chinese deals in just the past nine weeks.”

Six of the eleven Chinese IPOs have gone up from where their deals priced:

China Rapid Finance, China’s largest consumer lending firm; Bright Scholar Education, one of the country’s biggest education groups; Best Inc., a logistics company with ties to e-commerce giant Alibaba; Zai Lab, a biopharmaceutical company; RYB Education, an education center operator; and Sogou, a search engine backed by Tencent.

Five of the eleven have gone down:

Secoo Holdings, a luxury online retailer; Qudian, an Alibaba-backed financial technology player; Four Seasons Education, a math education company; and Jianpu Technology, an online financial planning firm that came public on Thursday.

Cramer noted that “winners” Best Inc. and Zai Lab are down from when they started trading, having spiked the moment they came public and drifted down since.

“There’s been a great deal of justifiable skepticism surrounding many of these names,” the “Mad Money” host said.

For example, China Rapid Finance had to lower its IPO price range before coming public at the low end. That stock has since recovered, up almost 60 percent from the day of its IPO.

Best Inc. had to reduce the number of shares it was offering by 17 million and slash its price range by 25 percent, coming public at the bottom of its already-lowered range.

Cramer said Secoo Holdings’ deal was also a “bust,” with shares opening below its $13 IPO price at $12.10 and drifting down ever since.

Qudian, on the other hand, had a strong opening in October, opening $2 above the high end of its stated range and surging $10 on its first trading day.

“But QD got too hot too fast,” Cramer said. “Investors quickly began to have second thoughts and by Oct. 26, barely more than a week after the IPO, the stock had traded down to $22.80 — more than a buck below where the deal priced — and it’s only drifted lower since then. If you bought this thing when it started trading, you’ve been crushed.”

Investors got tired of Rise Education quickly, too, selling the $16 IPO down to just above $12 in three days. This week, shares spent some time in the single digits before bouncing back.

Since then, the reception has only gotten worse, Cramer said. Four Seasons Education incurred a 5 percent loss on its first trading day. Shares of Sogou, so far the best-performing Chinese IPO from the last several months, have remained fairly flat since it came public last Thursday.

Jianpu Technology’s stock opened for trading at $8 on Thursday and exited the week down over 10 percent, with shares at $7.17 as of Friday’s close.

“Looking at all of these deals from the People’s Republic, a couple of things jump out at me. For starters … four of the 11 Chinese IPOs this year have been education companies,” Cramer said.

This initially struck Cramer as odd, but then it made sense. The “Mad Money” host figured that, after seeing Bright Scholar Education’s positive run, from $10.50 when it came public to just over $22 as of Friday, its competitors followed suit.

“Here’s the bottom line of this sorry story: this recent spate of smaller Chinese IPOs are not for homegamers like you,” Cramer concluded. “If you don’t understand a company, you shouldn’t be playing with its stock, which is why so many people have gotten burned on these deals. How the heck are you supposed to differentiate between BEDU, REDU and FEDU … if you don’t live in China? So if you want exposure to the resurgent Chinese economy, and I do want that, I say you stick with the big established names you can get your head around. Stick with Alibaba. Stick with Baidu. They have financials that look like American companies and they have been fabulous long-term winners. The others? Stay away.”

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Cramer says homegamers should stay away from the red-hot Chinese IPO market

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