From the editor’s desk, April 10, 2020.
Luckin Coffee’s share price dropped more than 80% last week after findings from an internal investigation concluded that the group had inflated sales figures for the better part of 2019. The implications for not only the company, but the Chinese ADR universe, are outlined in Carol Huang’s “Luckin Coffee fraud has big implications for Chinese issuers,” arguing that besides the securities regulator, investors too need to reevaluate their risk appetite and require better tools to achieve it.
Knowing this, the Luckin fallout could discourage similar Chinese private companies from going public. The benefits of keeping a closed book may outweigh the cost to access international equity investors. Equity investors want real price to earnings multiples when listing, not the promise of future profits.
Two companies that may end up testing this thesis are Nasdaq-listed WiMi Holdings and the Hong Kong-based Tycoon Group. In Christopher Chu’s “Investor appetite for niche names could be new ECM litmus test amid pandemic.” WiMi went public on the first of April, raising nearly $30 million in the process. The holographic service platform's successful debut shows that the pandemic has not erased investor appetite, but closing the first week below its IPO price, suggest that investors are becoming less generous in the space.
If there is any modicum of largess, it likely sits in the private money space. Carol Huang spoke to Legend Capital president Chen Hao, who maintains his confidence in “Chinese speed” as his fund rides fast regional development (Exclusive: China's top ten performing RMB PE and VC funds of the last decade).
Looking forward, Chen is betting on M&A activities picking up. “When big companies are getting bigger, it’s a natural process for them to consolidate the industry,” he added. “And industry development is accelerating.” The number of acquisitions will be boosted by the looming COVID-19 pandemic, which has slowed consumer demand to a trickle. In times such as these, the strong eat the weak.
And finally, we see some innovation in the debt markets. However, as Adrian Murdoch’s “The unusual flight path of Kazakhstan's first Falcon bond” sets out, raising in renminbi given its relative weakness is counterproductive, but the new offshore paper may help repair damage from previous allegations of fraud and embezzlement associate with the China-link Belt and Road project last years.
Warm water and detergent are good for removing coffee stains, does the same work for credibility?
Let’s see what happens in the markets next week.