China IPO outlook

Are you being forced to list in 2020? Blame Alibaba.

Alibaba’s successful HK listing, combined with mounting pressure from PE investors, is forcing Chinese companies to consider listing in 2020 despite the woeful stock market performance of many who floated in 2019.

Expect to see a higher number of completed IPOs from Chinese companies in 2020 than in 2019, analysts at China Renaissance investment bank predict. This is despite the poor secondary market trading performance of many who braved the markets to list in the last 12 months.

Chinese brands such as Ant Financial, Bytedance, Megvii and DiDi are all widely anticipated to float their stock soon, and although these high-profile names may reach the valuations they desire, many others could seriously struggle.

In 2019, 165 stocks were listed in Hong Kong, and among them, 60% were Chinese-headquartered companies. Of those 165 more than half found their stock price sink lower than the IPO price at the end of the calendar year.

In total, 373 Chinese firms listed their stock on 2019, either in China, Hong Kong or the US. Examples of those now struggling include online brokerage firm Up Fintech; its Nasdaq-listed stock is trading about one-third lower than its IPO price. CStone Pharmaceuticals, a biotech company, is trading at around 80% lower (at around HK$10).

GETTING ON WITH IT

However, private equity investors seem keen to find an exit for their investments. According to Alex Liu, TMT research analyst at China Renaissance, many are pressuring companies to list their stock as soon as possible. “In the current climate, such companies are typically faced with two options: Either [accept] a discounted price or look for merger and acquisition opportunities,” Liu said.

Alibaba’s debut in Hong Kong in November may push company executives to opt to list, with investors hoping its success – the share price has rallied 20% from its offering price of HK$176 – will buoy overall investor sentiment for the foreseeable, Bruce Pang (pictured), head of macro and strategy research at China Renaissance, told FinanceAsia.

We spoke to Pang about what other factors will influence the IPO market in 2020.

The following conversation with Bruce Pang has been edited for clarity and brevity.

Q Why was the performance of many Chinese stocks listed 2019 so poor?

A Investors are trying to figure out how to value companies correctly. The primary market price was high [in 2019] because there was abundant money supply in China. However, some companies’ valuation shrank in the secondary market in part because of overall economic uncertainties and fresh investor concerns over the [business] models of some of the companies who listed. The valuation method keeps evolving.

Xiaomi’s Hong Kong IPO set an example [in mid-2018]. But when Xiaomi’s stock price dropped, it changed secondary market investors’ appetite. That naturally affects the primary market as well.

Q What factors will drive Chinese unicorns to go public in 2020?

A A company like Ant Financial, the biggest unicorn in China right now, will likely take into account global macro issues such as the US-China trade war. Data-intensive companies are also under the spotlight. The Chinese government pays extra attention to unicorn companies who harness a lot of data; they are concerned about national security.  

The timing for these unicorns to list broadly depends on when the Chinese economy will recover. If the Chinese economy recovers faster than expected in 2020, then expect companies to list earlier.

Q Will Hong Kong be a preferred listing venue?

A Hong Kong will be mostly viewed neutrally. The Hong Kong Exchange and Clearing (HKEX) is taking some constructive measures to make it more appealing for IPO candidates. Discussions are continuing around including dual-class stock structure companies into the Hang Seng Index – this component is particularly attractive for Chinese companies, and unicorns too. We will have to wait at least until the second half of 2020 before the HKEX finally implements such measures.

Q Who do you expect to list in 2020?

A Investors will have a stronger preference for companies that have the largest market share in their respective sectors. Mid-ranged companies will be less likely to IPO as their valuation will be much lower than previously hoped.

Q There is talk of US-listed Chinese companies looking to also list in China or Hong Kong. What are the chances of this?

A Some Chinese companies are thinking of a second IPO in Hong Kong as a way to avoid/mitigate political risk. The Equitable Act, pushed through by US senator Marco Rubio, could see US-listed Chinese companies forced to de-list if they don’t comply with the new rules on financial disclosure.

When valuations rise for Hong Kong-listed TMT companies, those who listed in the US will all take a Hong Kong IPO into serious consideration. Outside of US regulatory scrutiny, the Stock Exchange of Hong Kong provides easy access for southbound investors via Stock Connect; Chinese investors can trade in the same time zone and the regulatory regime in the region will be more predictable.

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