Coming to market

EHang is one of the companies hoping to IPO in the US

The history of Chinese companies going public in the United States began in October 1992, when Brilliance China Automotive became the first of its kind to debut on the New York Stock Exchange.

Jiang Zemin, China’s leader at the time, is said to have compared the feat to “a pipeline connecting China with the financial world”. Eventually the pipeline fractured: the minivan manufacturer from Shenyang delisted 15 years later, blaming declines in trading volume and a rise in administrative costs.

Brilliance China’s dalliance with the US market foreshadowed what many of its successors would later experience. And yet Chinese firms of all sorts still flock to the Big Apple’s bourses. According to Dealogic, 18 Chinese companies have floated there this year ( of November 4), tapping a total of $2.8 billion in capital. Additionally, over a dozen companies are in the pipeline to make market debuts of their own, hoping to close their transactions this year, including passenger drone maker EHang (see WiC377), media-cum-co-working-space provider 36Kr, robotics company CloudMinds and even debt collector YX Asset Recovery.

The brisk activity in New York – which follows 36 IPOs last year raising $9.2 billion ­– has struck some as counter-intuitive, especially after a bipartisan group of senators introduced a bill in June to delist foreign companies unless they grant American inspectors full access to their audits (see WiC470).

If passed, the legislation would put US-listed Chinese companies in a double bind as Beijing is of the belief that the sharing of such records with foreign countries could risk national security, as well as pose a breach of its sovereignty.

Although the proposed legislation wouldn’t come into force immediately, with a grace period before full implementation, some companies are already preparing for the worst. Changes like these would presumably make some Chinese firms more wary about debuting on US markets. It was against such a backdrop that Alibaba filed for a secondary listing in Hong Kong in the summer (Alibaba has its primary listing in New York, of course).

But in the meantime there has been plenty of IPO activity, despite few of the Chinese stocks performing particularly well after their debuts. Of 230 companies to list, 40% have market capitalisations of less than $100 million, while 70% of the firms that debuted in the last two years have seen their share prices decline, The Economic Observer remarked.

Pre-IPO investors and the companies trying to get onto the New York bourses are “not overly panicked” about the legislation in the Senate, according to Ringo Choi, head of EY’s IPO division in Asia-Pacific. In part that’s due to hope that the bill could be dropped as part of trade negotiations between China and the US. And for a lot of the stakeholders, the threat of more stringent policies doesn’t outweigh the potential benefits of going public in the US, he said.

“The US market is generally more receptive to companies with innovative business models, giving them fitting, if not aggressive, valuations. And companies that are still operating at a loss – and we are talking about some rather substantial losses – could still present themselves as tempting investment cases there. The US market is therefore still very attractive to Chinese companies,” Choi told WiC.

Although Shanghai’s Nasdaq-style STAR board was launched in July with more relaxed rules compared to other Chinese exchanges (see WiC461), many firms still face major hurdles in seeking to float their shares locally. One reason is that regulators are ascribing a heavier weight to candidate companies’ capabilities in tech and business models in judging their eligibility to go public (see WiC471).

“Not many companies have strong confidence they’ll get listed on the STAR market as the regulator prioritises those with cutting-edge technology or dominant market position. Even if they do, there’s the issue of timeliness,” added Choi, noting that up to 200 firms are currently queuing for the chance to debut on the new tech board.

Last month STAR bosses said they would further delay the launch of an index designed to track the overall performance of the board, saying the overall market – which hosts 33 companies – was not large enough. The move struck some observers as odd, considering the index was set to be introduced in July when the number of companies was expected to reach 30.

“The real reason might be that an index looks less impressive when its historical performance shows a sharp fall from its initial surge,” the Wall Street Journal speculated.

STAR’s first listing, Suzhou HYC Technology, saw its trading volumes trail off from 29 million shares on debut day to 13.6 million the following week, and slump further to 2.4 million as of this Wednesday.

Such an underwhelming performance explains why some tech companies want to try for Hong Kong if the American route is closed off. One such applicant is Megvii (see WiC465), a Beijing-based artificial intelligence firm. New York is now off-limits for an IPO after Megvii was put on a US government “Entity List” over alleged involvement in human rights violations.

The need to cash out in an IPO comes at a time when fundraising in China’s private markets is getting tougher due to a slowing economy. In the first six months private equity and venture capital firms secured 30% less than they raised the prior year from investors, at $54.44 billion, according to TechCrunch. The number of funds set up also declined 52% to 271. As a result, investment in domestic startups was squeezed, plunging 54% to $23.2 billion.

“If the US decides to ban China-based companies from conducting American IPOs, that would be devastating. I also feel that it’s on the borderline of irrationality because there is so much synergy between the two economies, so I hope it doesn’t come to that,” Wei Jiang, venture partner at Zhen Fund, a leading seed investor, told a forum in Hong Kong. “But if it does come to that, then Chinese companies will have to find a way to go to domestic exchanges or go to Hong Kong. But I’m not sure if the liquidity will be sufficient in the Hong Kong stock market.”

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