Funny how life doesn’t turn out the way you think it will. Just ask Lei Jun, one of China’s most famous entrepreneurs.
When Lei was planning last year to list Xiaomi, a smartphone maker he founded in 2010, he was confident of achieving a $100 billion market valuation. The IPO didn’t live up to his expectations after investors questioned Xiaomi’s ability to counter declining smartphone sales in China.
Lei Jun settled for a $53 billion valuation when Xiaomi finally went public in Hong Kong in July last year. Some of the investors’ concerns proved to be spot on. As of this week, Xiaomi’s market value has dipped further to about $30 billion.
This month the serial tech start-up founder is back in the primary market once more. This time, it’s with an offshoot of Kingsoft Corp, a software firm he joined as employee number six in 1992 and currently chairs.
And Lei has been confounded again, although this time he is likely to be a lot happier.
The company in question is Beijing Kingsoft Office. Its main product is WPS Office, China’s answer to Microsoft Office and the software that made Kingsoft famous before it expanded into gaming and internet services.
When it decided to list on Shanghai’s new STAR Market (see WiC461) earlier this year, Beijing Kingsoft was seeking a valuation around the Rmb10 billion ($1.5 billion) mark. But its debut exceeded expectations and hit Rmb20 billion based on an IPO price of Rmb45.86 per share.
After opening for trading on November 18, its stock price has nearly tripled. It reached Rmb133.68 as of Thursday’s close, which gives the company a valuation of Rmb61.62 billion.
Few would disagree that Beijing Kingsoft is just the kind of stock Shanghai’s new tech bourse needs to boost its credibility and enhance its long-term prospects of becoming the Chinese rival to Nasdaq (something that Shenzhen’s ChiNext was unable to achieve a decade ago). The STAR Market is often cited as one of President Xi Jinping’s pet projects. Since its launch in July, it has been a testing ground for new IPO practices.
Principally, these centre on three major changes that might be rolled out to the wider market. They are: a scrapping of the initial pricing limit of 23 times earnings, the implementation of a registration system for prospective IPO candidates (rather than subjecting them to the regulator’s whim) and allowing stocks to trade in a 20% daily price band.
Where the STAR Market will always be more distinct is in its selection criteria – targeting companies, which are fast growing, but not yet necessarily profitable. The idea is to provide a capital markets incubator for tech firms that will prove to be a more compelling option than heading to the US.
Most of the initial 25 stocks that listed in July soared in value on day one (when there’s no price cap), then continued rising for another few months, before coming back down to earth with a bump. In late October Dongxing Securities noted that while it had taken investors six months to get up to speed on similar price spikes and collapses on ChiNext, it has taken just three on the STAR Market.
At its height, for example, molecular drug company Shenzhen Chipscreen Biosciences was trading at just over 900 times current year earnings after its stock price rose from Rmb20.43 at launch to a peak of Rmb102.3 on August 15. Today it is back down to Rmb58.27, which is still an elevated 550 times current year’s earnings.
Beijing Kingsoft is trading around 174 times forecast 2019 earnings, according to the estimates of one US investment bank. Proceeds from the IPO are being used to fund international expansion, particularly across Asia where the company has made inroads in India, Indonesia and most recently, Thailand.
Its parent is now planning another spin-off; this time Kingsoft Cloud, which was last valued at $2. 4 billion following its series D fundraising in February 2018.
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