Listing in a listless market

Investor appetite for niche names could be new ECM litmus test amid pandemic

Looking to raise billions via an IPO? Well, you could be out of luck for some time, but smaller players with less onerous ambitions and a niche offering - such as WiMi Holdings and Tycoon Group - may buck the depressing trend.

Asian primary equity markets closed the first quarter of 2020 having completed more than $18 billion in IPO deals, according to Bloomberg data. While almost double the amount during the same three-month period a year earlier, the momentum was lost in March when secondary markets fell into a tailspin. To place into context, during the final quarter of 2019 Asia raised $51 billion.

Amid the coronavirus outbreak and the subsequent standstill in global economic activity, the deal outlook for the remainder of the year is grim. With multinationals preferring to utilise credit facilities and financial institutions like European banks planning to scrap dividend payments to shareholders, equity fundraising is far from a smart move.

However, some companies within niche industries are braving the waters, and their success may prove that despite how desperate things have become, there are windows of opportunity for the right issuers. 

Profitable Technology

Nasdaq listed WiMi Holdings, the augmented reality (AR) holographic service and provider, raised almost $30 million when its shares went public on April 1. Benchmark Company underwrote the deal.

The interests in AR holographic demand stems not only from more demanding entertainment platforms but for work and education purposes as well, where the groups cites ownership for more than 3,000 proprietary and licence intellectual property  AR content, making up two thirds of its total, according to the prospectus.

But besides measuring customer interests, listing as an American depositary receipt (ADR) also tests investor trust for Chinese companies trading in New York, where only seven out of the 34 ADR companies that went public last year are trading above their IPO price.

Faith in ADR’s has further been shaken following an internal investigation by Luckin Coffee discovered the group had falsified sales data, leading to an 80% drop in the market value and the suspension of the several employees, including the chief operating officer. WiMi shares are slightly below but trading better than the overall market.

Investors are already nervous about the viability of unprofitable companies that heavily rely on shareholder equity to operate. To Wimi Holding’s credit, the group has turned a profit each of the past three years according to its prospectus, reporting net income of Rmb 99 billion for 2019, compared to Rmb 89 million the year before.

Hong Kong Retail Health

The second is Tycoon Group, a provider and distributor for health and well-being related products that include hand sanitizers, thermometers, and surgical masks, is planning to list on the Hong Kong main board in the middle of April.

Tycoon Group, which reported adjusted net profits of HK$69 million at the end of 2019, compared to HK$107 million the year earlier, according to its investor presentation. The group holds an 8% market share in the proprietary Chinese medicine products distribution product. SooChow Securities are working with Tycoon on the deal.

But more than a barometer for health-related stocks, the listing of Tycoon Group acts as a gage into Hong Kong Economy, which contracted 1.2% in 2019. Weak growth momentum from the protests last year left Hong Kong’s economy vulnerable to the COVID-19 disruption. For the first two month of the year, retail sales in Hong Kong have fallen more than 32%. Chinese drugs and herbs have fallen 24% while medicine and cosmetics are down 43%, according to Hong Kong’s census and statistic department.

Together, the deals for WiMi Holdings and Tycoon Group is less than $100 million, relatively small and unlikely to immediately catch the attention of large institutional investors. But investors have shown some interest for specific sectors, which could be an indication for the quarter ahead.

Second quarter deals will likely provide better scope for the deals for the remainder of the year should the social distancing and travel restrictions remain in place longer than anticipated. Some companies have shown that virtual meetings are a feasible option.

InnoCare, raised nearly $300 million at their virtual IPO listing on March 20. When asked why they choose not to postpone, management cited that because audited financial reports and legal papers already filed, it was better “get the IPO behind us so we can focus on the scientific projects,” according co-founder Jasmine Cui Jisong speaking to The South China Morning Post.

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