A new wave of Chinese tech companies are rushing to sell their shares through initial public offerings (IPO), with at least one listing reportedly attracting interest from the three wealthiest people in greater China. But pricey valuations are proving to be a hard sell to other investors against a backdrop of escalating trade tensions.
So far this year, 26 Chinese tech companies have offered to sell $8.5 billion worth of new shares, accounting for 9% of global IPO volumes, according to Dealogic. That includes smartphone maker Xiaomi, which intends to raise up to $6.1 billion through a Hong Kong share sale that’s expected to be the world’s largest IPO in the past two years. Meituan-Dianping, a food delivery and online services provider, has alsofiled for a Hong Kong listing later this year. The Beijing-based company is said to be targeting a $60 billion valuation.
Meanwhile, even bigger listings are in the pipeline: Ant Financial is gearing up for a public float that may happen as early as next year. The payment affiliate of Alibaba had just completed a mega-funding round in June that valued the company at a whopping $150 billion. But some analysts have been urging caution amid the sudden surge in IPOs because they say that valuations at such levels will be hard for most companies to justify in the near term.
The companies tapping public markets now are taking advantage of a recent change in Hong Kong’s listing rules. In a bid to attract more tech firms, the city’s bourse began allowing IPOs for companies with dual-class shares that allows founders to have stronger voting rights than other shareholders. It’s an ownership structure widely used by tech giants in the U.S. and China to ensure that management retains control after the company sells its shares. After years of rapid growth in their home market, some Chinese tech firms are now looking to continue expanding in overseas markets and require more capital to do so. Xiaomi, for example, is expanding into Europe to compete with Apple and Samsung for the attention of smartphone shoppers there.
“There hasn’t been a lot of China tech IPOs since Alibaba,” says Paul Gillis, a professor of accounting at Peking University’s Guanghua School of Management. “Now, a lot of these companies are ready and the market is also in good shape.”
But market sentiment can change swiftly. Another factor that’s contributing to the timing of the new listings has been the escalating trade tensions between the U.S. and China. Financial markets worldwide have been buffeted by threats of tariffs on a range of different goods, and may lead to further volatility for tech stocks, says Benson Wong, entrepreneur group leader at PricewaterhouseCoopers (PwC) in Hong Kong.
A few of Asia’s most successful business leaders seem to agree. Li Ka-shing plans to buy $30 million worth of shares of Xiaomi, while Tencent’s Pony Ma and Alibaba’s Jack Ma are also acquiring unspecified stakes in the smartphone maker, according to a Bloomberg News report. Having the backing of the richest person in Hong Kong and the two richest in China will help to address some of the questions and skepticism that has surrounded the listing.
Xiaomi’s co-founder and CEO Lei Jun has been touting his company’s potential as an Internet services company that makes money off advertisements and games that can be delivered on the company’s growing line of low-cost devices. The margins for such services are far greater than what the company can get from the smartphone business that still supplies the bulk of its revenues.
But the China Securities Regulatory Commission had publicly questioned whether it would be “accurate” for Xiaomi to position itself as an Internet company, as 70% of its revenue is derived from its smartphones business. In addition to its IPO in Hong Kong, Xiaomi had also been planning to sell shares in mainland China through a new form of securities called China Depositary Receipts (CDR), but those plans have since been shelved indefinitely. Stock markets in China have an unwritten rule of capping new listings at 23 times historical earnings, making it unattractive for fast-growing tech firms like Xiaomi. The smartphone maker’s initial ambition was to sell shares at a valuation of $100 billion, which values the company at 54 times 2017 operating profit. By comparison, Apple, the world’s most profitable smartphone, and device maker, is valued at 15 times 2017 earnings, while China’s largest Internet company Tencent is valued at 34 times of its operating profit last year.
“Whether it is Hong Kong or mainland China, there are certain controls on valuation levels to ensure market stability,” says Ken Xu, a Shanghai-based partner at investment firm Gobi Partners. “For China’s tech companies to list, they have to strike the right balance between this and the valuation targets they want.”
Fear Of Missing Out
Meituan is likely to face similar challenges. Peking University’s Gillis says the company’s $60 billion target is “hard to understand,” given that Meituan revealed a steep loss of $2.9 billion last year, which includes one-time items such as share-based compensation and changes in the value of preferred shares. But the company has also been spending aggressively to gain market share amid fierce competition with rival services backed by e-commerce giant Alibaba and Chinese travel firm Ctrip.
Still, there is likely to be demand for the shares, Xu says. Both Xiaomi and Meituan are household names in China and market leaders in their respective business segments, and they may eventually rise to challenge the country’s traditional tech trinity of the BAT firms – or Baidu, Alibaba and Tencent.
“Their valuations are indeed at very expensive levels,” Xu says. “If you look at their fundamentals, then the targets aren’t very reasonable. But everyone is betting that these companies will become the next big thing in China, and people are worried about missing out.”