IPO duo slash valuation targets amid weak HK market

One of them, Baytree, could even be worth than less than implied six months ago when Alibaba invested in it during pre-IPO funding.

Two companies looking to sell their shares in Hong Kong have been forced this week to rein in their expectations in the face of the local market's continued retreat -- so much so that one of them could even be worth than less than implied six months ago when Alibaba invested in it.

In what could be a first for the city, Babytree Group is now conducting an initial public offering at a valuation below its pre-IPO funding level.

Investment bankers said both Tongcheng-Elong and maternity and child care platform Babytree Group had made last-minute changes to their IPOs, resulting in a slight delay to their original schedules.

On Friday, Chinese online travel agency Tongcheng-Elong abruptly called off its IPO launch after bigger rival Ctrip posted disappointing third-quarter results and in response shed $3.5 billion off its market value as its share price fell 19% on Nasdaq.

Jiangsu-headquartered Tongcheng-Elong subsequently launched its 144 million-share deal on Tuesday looking to raise just HK$1.8 billion ($232 million) -- way down on the $1 billion-plus that had been talked about before.

Once the IPO is completed the company will be valued at anywhere between $2.6 billion and $3.3 billion based on the deal's indicative price of HK$9.75 to HK$12.65 per share. That compares with Ctrip’s current valuation of $13.8 billion (and about $19 billion before the stock plunge last week).

Meanwhile, Babytree Group launched a smaller-than-expected IPO on Wednesday targeting maximum proceeds of $2.2 billion ($280 million). It too had aimed for something closer to $1 billion when Hong Kong stocks were some 31% higher than currently, at the beginning of the year.

What is more astonishing is that Babytree could end up with an implied valuation of only three quarters of its last funding round in the private market.

Based on its IPO price of HK$6.8 to HK$8.8 per share, Babytree will be valued at between $1.44 billion to HK$1.88 billion. The company raised $214 million from e-commerce giant Alibaba in May, which valued it $2 billion.

While the Alibaba investment may not be considered a public funding found, Babytree has set what could be the first case in Hong Kong where a company is conducting an IPO at a valuation below its pre-IPO level.

And with valuations already showing signs of peaking at the private equity level, it could mean that IPO valuations will remain under pressure in the short term – dashing the hopes of investors looking for a market turnaround before year-end.

HEADWINDS

The way Tongcheng-Elong and Babytree Group have both approached the primary market highlights the underlying fragility of the Asia ex-Japan IPO market, where disappointing after-market performances largely overshadow the fact issuance volume is up about 40% year-on-year.

On a company level, some analysts have pointed out that both Tongcheng-Elong and Babytree are facing operational headwinds that could affect their prospects in the short term.

Tongcheng-Elong's pure-play travel-related business comprising flight and hotel bookings is being challenged by new entrants like Meituan-Dianping and Fliggy, Alibaba’s self-developed online travel booking site. Ctrip's sub-par quarterly results may already reflect these growing competitive pressures.

In the case of Babytree, some analysts have voiced concerns about its ability to monetise its traffic since it remains largely a community platform for parents to share their childcare experiences. Some are also sceptical that it can grow its user base since the platform already has a high penetration rate among mothers and would-be mothers.

Tongcheng-Elong's IPO bookbuild ends November 19 and trading is set to begin on November 26. For Babytree, the bookbuild will close on November 20 with trading scheduled to start November 27.

Joint sponsors of Tongcheng-Elong's IPO are Morgan Stanley, JP Morgan and CMB International.

Joint sponsors of Babytree Group's IPO are Morgan Stanley, Haitong International and China Merchants Securities.

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