Drew Bernstein
Didi Chuxing initial public offering could drive significant tailwinds for Chinese issues
Chinese IPOs had a strong start in the first quarter of 2021, with 24 initial public offerings from Greater China that raised $5.8 billion. According to Renaissance Capital data, that's up by 728% over the $700 million raked in by Chinese names listing on NASDAQ and the New York Stock Exchange in the first quarter of 2020.
The United States IPO market had its strongest start in 20 years, with 100 operating companies ringing the opening bell and pocketing $39.2 billion, up by 476% from the $6.8 billion in Q1 of 2020. This is an all-time record for capital raised in Q1 on the U.S. stock markets. That dramatic performance was dwarfed by the $87 billion raised by 298 special purpose acquisition companies, exceeding the entire capital raised by SPACs in 2020, which was itself a record year for the SPAC format.
While deal activity from China was vigorous, aftermarket performance lagged the market at a negative 15% return for names from Greater China, versus a positive 6.7% for the overall U.S. initial public offerings and positive 2% for SPACs, as of April 14, 2021. A rotation away from tech and diminished “SPAC-phoria” seen in January and February dampened the dramatic gains experienced by the IPO market in 2020. It is worth noting that SPAC shares typically trade very close to the value of the cash in trust until a merger target is announced, and the speculative pops seen earlier in the year in SPAC IPOs were a historical aberration.
Among the Chinese names that set the pace for the market include e-cigarette manufacturer RLX Technology, Inc. (NYSE:RLX) who raised $1.4 billion, cloud software as a service company Tuya, Inc. (NYSE:TUYA), which scooped up $915 million, and question and answer website Zhihu, Inc. (NYSE: Z.H.), which raised $523 million. All three names are trading below their IPO offer price as of this date. The Chinese companies that had their U.S. IPO in 2020, by contrast, have returned positive gains on average of 28% as of April 14, 2021.
Didi Blockbuster IPO Could Set Pace for Balance of 2021
Potentially blockbuster news for China's cross-border listings that China’s ride-sharing goliath, Didi Chuxing, had filed confidentially with the SEC for an initial public offering. Goldman Sachs and Morgan Stanley are in the lead positions, and Didi is reportedly targeting a $10 billion raise with a valuation of $100 billion, according to Reuters. If this deal is well received, it could create powerful tailwinds for other unicorns from the PRC to flock to U.S. shores, following the failure to launch the Ant Group planned IPO on Hong Kong and the Shanghai STAR market.
Listing activity by Chinese companies on domestic exchanges continued to be robust. However, volumes were down from Shanghai's blistering pace last year as its STAR Market for innovative companies gained traction with growth-stage domestic tech companies. China’s CSRC has subsequently dialed up oversight of this market with a disclosure-based system intended to be China's answer to NASDAQ. Concerns over the $2.8 billion fine levied against Alibaba, mandated restructuring of Ant, restrictions on founder Jack Ma, and the increasing anti-trust oversight of Alibaba, Tencent, and other China tech giants have dampened valuations and investor sentiment for these internet Goliaths.
NASDAQ and NYSE Lead the Pack for IPOs in Q1
During the first quarter, NASDAQ led the global new listings race, with $22.1 billion in IPO proceeds, followed by the New York Stock Exchange with $15.6 billion, Hong Kong with $13.9 billion in third place, and Shanghai Stock Exchange in fourth place with $6.9 billion. These figures do not include SPAC IPOs where the U.S. exchanges captured essentially 100% of global listing activity. Hong Kong continued to benefit from so-called “homecoming IPOs” by Chinese companies listed on U.S. markets, which accounted for 37% of proceeds raised on the Hong Kong Stock Exchange in Q1 2021. This included established China tech names such as Baidu Inc. (NASDAQ:BIDU), Bilibili Inc. (NASDAQ:BILI), and Autohome Inc. (NYSE:ATHM).
While all of these companies could bolster their balance sheets, the earlier first-day trading pops from homecoming IPOs fizzled in 2021, leaving little impact on underlying valuations. The data suggests that most of the trading volume remains on the U.S. home market, rather than migrating to the Hong Kong Stock Exchange. The homecoming listings make sense to create an anchor to windward in the case of further regulatory interventions on Chinese listings in the U.S. But institutions will always trade on the best available platform. Absent another escalation in regulatory tension by the U.S. government regarding Chinese listings; this begs the question of how sustainable this trend will be. However, Hong Kong has proven itself a viable destination for technology companies, with 79% of new listings coming from tech in Q1 of 2021, compared to 25% in all of 2020.
Will SPAC IPOs Come to Asian Exchanges?
Given the absolute dominance of SPAC IPOs in the U.S. market this year, it is understandable that Singapore and Hong Kong would be wanting to get in on the game. Both the Hong Kong Stock Exchange and Singapore Stock Exchange are working to develop a framework for special purpose acquisition companies and regulations that work for their local markets. But if SPAC sponsors want to do big deals with world-class institutional backers, best liquidity, and access to follow on equity and debt – the U.S. is still the gold standard. The Asian institutional sponsor community is now very comfortable with the U.S. SPAC program. Still, they need to make sure that their chosen “unicorn” targets are ready for prime time as newly public companies.
The traditional IPO will still be the best path to going public and fundraising for many companies, and now we have direct listings as an emerging third option. But the SPAC has come of age as a viable alternative, and the right choice comes down to timing, public company readiness, cost, market risk, the potential value-add of SPAC sponsors.
Quality of management, reliability of audits, corporate governance, and internal controls continue to be front and center among investor concerns regarding capital allocation towards initial public offerings coming out of Greater China to list in New York. Management teams and cornerstone investors who wish to achieve long-term success in the U.S. markets would be well advised to make the investments in PCAOB-compliant audits, strong internal controls for financial reporting and disclosure, boards with a significant presence of independent directors with global capital markets experience, and excellence in investor communications practices.
If Chinese companies and their backers and advisors get that right, 2021 could be one for the record books.
