Guzov Ofsink, LLC | Made in China: The Latest Market Craze

A real-estate agency that was launched in 2000 sees its shares rise 41% on the first day of trading. A budget hotel chain formed five years ago more than triples in price during its first 12 months as a public company. A software company that most Americans had never heard of three months ago delivers the second-best debut on a U.S. exchange this year.

It's not the dot-com craze this time. It's China.

U.S. investors just can't seem to get enough of Chinese companies that choose to list on American exchanges this year, and the stocks have the resulting price inflation to prove it. Each of the seven initial public offerings of a Chinese company since July has been sold at the high end or above its expected price range.

The last "bad" Chinese IPO was solar cell company Yingli Green Energy Holding Co. It priced at the low end of its range and declined 5% on its first day of trading in June. But it has since tripled from its IPO price of $11.

Such moves have some market observers worried that a bubble is forming around the country's offerings -- and that big disappointments could lie ahead.

"For me, the big issue is how reliable are the earnings? I don't know," says Howard Gold, editor in chief of investor-education Web site Moneyshow.com. "I can't really think of anything right now that's going to undermine the Chinese miracle, but I'll bet if you asked people in January 2000 what would do it to Nasdaq, I don't think anyone could have come up with anything then, either."

Other observers and analysts say there is a big difference between the Internet stock bubble that burst in 2000 and the current craze for Chinese offerings. In the late 1990s, some stocks were gaining in the triple digits on their first days of trading. The biggest Chinese gainer this year is Longtop Financial Technologies Ltd., whose 85% jump last week earned it the No. 2 spot among IPO debuts this year.

Many Internet stocks were receiving rich valuations, even though their business models relied on the number of viewers they could attract rather than their ability to turn a profit; every one of the 19 China-based stocks that has listed in the U.S. this year has been profitable, and many are in "solid brick-and-mortar types of businesses," says Darren Ofsink, an attorney at Gusov Ofsink LLC who has worked on a number of Chinese companies' IPOs.

Much of the attraction is derived not only from the country's overall economic boom, but also from the fact that many established businesses in the West, such as hotel chains or for-profit education, are at an earlier growth stage in China.

Further driving demand is the relative scarcity of companies that are choosing to list in the U.S., says Linda Killian, portfolio manager of Renaissance Capital LLC's IPO Plus Aftermarket Fund.

Most are listing in Shanghai, which is generally off limits to international investors, or in Hong Kong, where prices also are jumping.

"We're not only playing on China's growth; these are growth sectors within a growth economy," said Ms. Killian, who added that about 10% of the fund's stocks are Chinese. "Some of the companies are expensive, yes. But if you have a long perspective, you can justify it. These are very long-duration investments."

Given their run-ups, that perspective might need to become even longer.

Real-estate agency E-House (China) Holdings Ltd.'s 41% first-day pop during its August debut didn't stop there; its New York Stock Exchange-listed shares closed Friday up 146% from its IPO price of $13.80.

Some that have been trading much longer show no signs of cooling, even as their stocks take on dot-com-era valuations. Budget hotel chain Home Inns & Hotels Management Inc., which operates 300 hotels in China and trades on Nasdaq, has more than tripled from its IPO price of $13.80 in October 2006.

It now trades at 200 times trailing 12-month earnings. Compare that to New Jersey-based Wyndham Worldwide Corp., which has 6,500 hotels, including nearly 50 Super 8 motels in China, and trades at a 17 multiple.

Of course, there have been some cautionary tales along the way; LDK Solar Co.'s stock, which had nearly tripled in price since its June IPO, plummeted after a former executive alleged the company had misstated its inventory. While it is still 40% above its May IPO price of $27 a share, that is little comfort for investors who bought it at its September peak of $76.75.