For a year marked by the Luckin Coffee scandal, the Covid-19 epidemic, Sino-American tensions, and slowing economy, 2020 has been a fruitful one for grand Chinese listings. Over the past few months, a slew of Chinese companies debuted with fanfare, seeing significant investor interest and upsized IPOs.
The latest of those, electric vehicle maker Li Auto (Nasdaq: LI), raised $1.1 billion last week and as of Thursday traded up 61% from its issue price. Agora Inc. (Nasdaq: API), a real-time engagement API provider, exceeded the level of $40 per share earlier this week after going public at $20 in late June. Shares in Dada Nexus Ltd. (Nasdaq: DADA), JD’s local grocery delivery platform, closed at $27.34 per ADS Thursday – that’s compared to the issue price of $16 in June. Kingsoft Cloud Holdings Ltd. (Nasdaq: KC), which raised $510 Million in May, priced at $17 per ADS, today trades at more than double that level. Just to name a few.
Another big Chinese company, real estate services provider KE Holdings Ltd. (BEKE), is fast-approaching its initial public offering. Last month, KE Holdings has applied for an offering worth $1 billion – however, Renaissance Capital says the company could raise twice or thrice that amount.
CapitalWatch asked Renaissance senior strategist Matthew Kennedy for some insight into the Chinese IPO which could be the biggest one of the year in New York.
CW: Do you expect KE Holdings' IPO size will be at or near the $1 billion its prospectus lists?
Matthew Kennedy: We expect BEKE to raise more than $1 billion. We believe the $1 billion amount is a placeholder for an IPO that we estimate could raise $2 to $3 billion.
CW: Do you think its performance on IPO day will be impacted by the U.S.-China relations and/or the mistrust from the Luckin Coffee scandal?
MK: I don't expect so.
It's a concern for some, of course, but we haven't seen the type of widespread distrust of Chinese IPOs that we did during the accounting scandals in 2012. The latest Chinese company to list in the U.S., Li Auto, upsized its IPO to raise $1.1 billion before popping 43% on its first day. Rather than focusing on the potential downside of deteriorating political relations or the risk of fraud, we believe investors are still largely judging Chinese IPOs based on each one's fundamentals.
CW: Could this be the bellwether for future China IPOs in the U.S.?
MK: Yes. If you're looking for a bellwether for Chinese issuers in the U.S., the largest Chinese deal of the year is a good candidate (it should be the largest in over two years, at least).
This is a large company in an important area that is well-integrated with China's larger economy, and I believe its reception will reveal how the market views investing in China, to some extent.
Though again, I have to caution that investors evaluate each IPO individually, based on its own merits. Covid-resistant plays, such as cloud services (e.g. Kingsoft Cloud) are particularly attractive, so KE Holdings' online unit should get the most interest.
CW: Will this IPO impact other Chinese real estate stocks like Fangdd Network Group (Nasdaq: DUO)?
MK: DUO rose 8% the day that BEKE filed, but since then DUO's stock has declined 27%. It's possible that investors have sold DUO in anticipation of being able to invest in its larger and faster-growing competitor. However, that would be speculation; it's impossible to attribute that trading to BEKE for sure. And if BEKE ends up trading very well, that could be a positive sign for DUO, which would then have a close peer with a high multiple, and potentially see its own valuation rise because of it.
SoftBank- and Tencent-backed KE Holdings operates China's largest housing services platform Beike and real estate brokerage Lianjia. In 2019, Beike facilitated over 2.2 million housing transactions and landed a gross transaction value (GTV) of 2,128 billion yuan ($300.5 billion), according to its preliminary prospectus.
Citing research by China Insights Industry Consultancy Ltd. (CIC), Beike said it was the largest housing transactions and services platform in China. As of June 30, its network counted more than 260 real estate brokerage brands and 456,000 agents in 103 cities.
For the first quarter, KE reported revenues declined 13% year-over-year to $1 billion. It had turned up losses of 173.9 million in contrast to an income of $23.6 million a year ago. The company posted revenues of $6.5 billion for the full year 2019 on losses of $307.9 million
KE said it intends to use the proceeds from its IPO in New York for research and development, including big data, artificial intelligence, and virtual reality. It also plans to expand its new home transaction services and diversify its services and operations, as well as expand into new locations.
Goldman Sachs (Asia) LLC, Morgan Stanley & Co. LLC, China Renaissance Securities (Hong Kong) Ltd., and J.P. Morgan Securities LLC are securing the IPO.
In addition to offering institutional pre-IPO research, Renaissance Capital is a provider of IPO-focused ETFs (NYSE: IPO, IPOS). Reflecting the heat of the 2020 IPO market, its U.S. index is outperforming its benchmark by more than 40 percentage points, and the non-U.S. IPO index is outperforming its benchmark by more than 30 percentage points.