PERSPECTIVE: An Evolution in the Chinese IPO Market

China has only seen 11 companies IPO in the United States so far this year, raising less than $1.5 billion.

Steve Kanaval
    Sep 08, 2019 5:10 AM  PT
PERSPECTIVE: An Evolution in the Chinese IPO Market
author: Steve Kanaval   

IPOs have certainly been in vogue in the U.S. market. Uber (NYSE: UBER), Lyft (Nasdaq: LYFT), Beyond Meat (Nasdaq: BYND), Pinterest (NYSE: PINS), Cloudflare, and Zoom Video Communications (Nasdaq: ZM) are some of the big names to ring the bells this year, and there are more notable companies coming in the next few weeks like Peloton and the contentious WeWork.

Even with some hiccups, the unicorns which went public this year helped boost the market through geopolitical tensions. But, one of the most important players in the international market has seen a decline in IPOs: China.

Chinese IPOs Decline in 2019

China has only seen 11 companies IPO in the United States so far this year, raising less than $1.5 billion. It is somewhat surprising that the world's second largest economy only saw a 4 percent representation of this year's crop of IPOs. The year is not over, but this would represent a significant slowdown compared with 2018. Last year, about 40 Chinese companies went public on U.S. markets – representing a potential 72 percent decline year-over-year. 

These numbers are surprising because business leaders usually look to get ahead of potential economic downturns and come public using an IPO before the storm hits. To review, last year video behemoth iQiyi (Nasdaq: IQ) raised $2.4 billion, e-commerce company Pinduoduo (Nasdaq: PDD) raised $1.63 billion, electric vehicle manufacturer Nio (NYSE: NIO) raised $1.15 billion, and Tencent Music (NYSE: TME) raised $1.07 billion. So far, a Chinese company has yet to cross the $1 billion dollar mark this year with DouYu (Nasdaq: DOYU) raising the most, at $775 million.

Here are some additional 2019 IPO highlights:

  • 9F – the company's IPO date was August 15, listing shares at $9.50 each. Since the IPO, the stock has rallied and has been trading above the $13-mark.

  • DouYu – the company's IPO date was July 7, listing shares at $11.50 each. Since the IPO, the stock has fallen trading in the mid-$9-mark.

  • Yunji – the company's IPO date was May 3, listing shares at $11 each. Since the IPO, the stock has seen an even worse dip than DOYU, at the time of writing it has traded in the $7 range.

Overall, these numbers seem to indicate that China is slowing down, but this is far from the case. As of May, China boasted 89 "unicorns" – private companies valued at over $1 billion – they could be hitting public markets soon and the names are very interesting.

Ant Financial, the fintech arm of Alibaba Group (NYSE: BABA), has more than double the market cap of Uber and the company raised $14 billion last summer. ByteDance is another tech giant in the making most known for its short video app, TikTok. It is valued at $75 billion. Lastly, Chinese ride-sharing company, Didi Chuxing, has an estimated valuation of $51.6 billion.

A More Competitive Landscape at Home

While these names are exciting for U.S. investors, the Land of the Free might be a less likely choice than it used to be because of the ongoing trade war. Furthermore, Mainland China and Hong Kong's exchanges are bringing increased competition to the Nasdaq and the NYSE. Years ago, China's technology powerhouses chose the U.S. because of looser restrictions on share structure, market valuation and profitability. However, those days might be a thing of the past.

The Hong Kong Exchanges and Clearing Market, or HKEx, loosened its rules for tech companies and even for biotech companies that are not profitable. These were the biggest reforms seen on the exchange in more than three years. Next, the Shanghai Stock Exchange also launched its new Science and Technology Innovation Board, or the so-called STAR market, in June, after Chinese President Xi Jinping said last year the country needs to encourage domestic investment in its homegrown innovative firms. At the same time, the China Securities and Regulatory Commission (CSRC) has accelerated the issuance of IPO approvals.

"The IPO window is open in Hong Kong, and will stay open," Bao Fan, the chief executive and co-founder of Chinese Renaissance, told the South China Morning Post. Bao's company is an investment bank that acts as a key adviser on Chinese tech IPOs and M&As.

So far, the HKEx has raised $4.4 billion in IPOs this year – looking at the data up until the end of May – which is small potatoes compared with the NYSE and Nasdaq total of $29.8 billion. This was a very slow start for what is typically the world's biggest market for IPOs.

Just remember, Western luxury brands like Prada, L'Occitane, Jimmy Choo and Samsonite went public in Hong Kong instead of their home country, seeking to establish brand recognition and get closer to new money in emerging markets like China and Southeast Asia.

The HKEx raised $37.5 billion last year and most analysts expect the market to pick up especially considering Alibaba is seemingly waiting out protests for its second listing on the HKEx totaling an estimated $15 billion (Alibaba's decision to postpone its offering did not stem from pressure from Chinese authorities, according to one of the people briefed on the company's plans). Alibaba holds the record for the world's largest initial public offering with its $25 billion float in New York five years ago. When this offering does go forward, it will be the biggest follow-on share sale globally in seven years. Listing in Hong Kong would also give mainland Chinese investors their first direct access to one of their country's biggest success stories, via the stock connect trading link between Hong Kong, Shanghai and Shenzhen.

However, it is important to note how protests could hamper this historic offering. The Hong Kong government has shown little sign that it will acquiesce to the demands of demonstrators, which is impacting the fertile financial territory of Hong Kong – a trade conduit with China, open borders and low crime rates – and this could certainly trickle down to other companies besides Alibaba. For example, logistics real estate developer ESR Cayman Ltd. on Thursday pulled what would have been the largest Hong Kong listing so far this year, citing "current market conditions."

Global deregulation has created significant change in how companies leverage public markets, the days of the U.S dominating the exchange landscapes are over as the world becomes a larger investment pool. We fully expect this trend to continue and will look at Alibaba as a pivot in IPO offerings as the global lines blur. A new age global investor is forming before our eyes as China evolves on the initial public offering landscape.

(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has no positions in any stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)