Drew Bernstein
Best year for China IPOs since 2014, with proceeds up by 270% over 2019 to $13.3 billion
The White House put over a dozen Chinese companies on an investment blacklist. Congress passed legislation to enforce long-neglected requirements for audit inspections or delist the offending companies from U.S. exchanges. China’s government announced antitrust investigations that shook the value of internet goliaths, Alibaba and Tencent.
Despite these headwinds, Chinese companies continued to flock to U.S. exchanges in 2020, with 39 new IPOs that raised $13.3 billion in 2020, according to Renaissance Capital data. That’s up by 270% from the $3.6 billion haul by 28 companies in 2019.
Investors embraced innovative Chinese "unicorns" from the technology, electric vehicles, biotechnology, retail, and real estate sectors, with the average Chinese IPO returning 58%. While this lagged the sizzling hot 82% return of the overall IPO market, Chinese offerings of over $100 million were up by 94% on average, beating the IPO market average and trouncing the 16% return of the S&P index last year.
Some of the standouts for 2020 included EV-makers Xpeng and Li Auto, internet infrastructure players Dada Nexus and Kingsoft Cloud, and real estate platform KE Holdings, all of which were up by nearly 200% as of mid-January 2021. At one point, the small online food retailer Wunong Net Technology rocketed by over 2,000%, before retracing some of those gains, a wild ride that outgoing SEC Chair Jay Clayton labeled an example of “euphoria” by retail investors for speculative IPOs.
The strongest performers from China reported revenue growth in the high double digits or even triple digits, underlying investors’ hunger for growth equities. Many also count established public companies as strategic investors, potentially adding credibility to their investment stories. The SPAC boom came to Greater China in 2020, with nine special purpose acquisition companies going public, all of which are actively seeking merger partners in China or Southeast Asia in 2021.
Top Advisors for China New Listings
Goldman Sachs led the pack in 2020 for U.S.-China IPOs in 2020, with six deals in the lead left position, followed by Credit Suisse and Morgan Stanley with four deals apiece, and Citi and AMTD helming three IPOs each. Asia-based investment banks played an increasingly important role in these deals, with firms including CICC, China Renaissance, Loop Capital, Haitong, and Tiger Brokers all co-managing Chinese listings on U.S. shores.
Skadden Arps expanded its franchise as the top choice for corporate counsel in 2020, providing legal advice to 12 Chinese IPOs, followed by Davis Polk and SPAC-specialist Ellenoff Grossman, with five deals apiece.
Among audit firms, PwC opined on the books of 13 U.S.-China deals in 2020, followed by E&Y with six deals, and Marcum/MBP with five China IPOs for 2020.
Among investor relations firms, Piacente Group picked up seven new Chinese IR clients in 2020, followed by ICR and Christensen with five deals apiece.
Competition for Chinese IPOs Heats Up
Competition for new Chinese listings among global stock exchanges remained fierce. China's economy emerged first from the COVID swoon, with exports and consumer spending showing surprising strength in the second half of 2020. Hong Kong ranked second behind NASDAQ for global IPOs, with 154 new issues that raised $51 billion. This surge was powered by large “homecoming” secondary IPOs of U.S. listed tech companies like JD.com and NetEase.
Shanghai’s stock exchange was a strong #3 in proceeds with $49 billion raised, primarily driven by the popularity of the tech-centric STAR Exchange, which has removed the profitability requirement for mainland IPOs and allowed market forces to determine IPO pricing and trading. IPOs on STAR had an average first-day pop of 187%, feeding a frenzied appetite for these listings. If Chinese regulators had not suspended the planned $35 billion dual-listing of Ant Financial, Hong Kong and Shanghai would likely have ranked #1 and #2 respectively for global IPO funds raised.
Taken together, companies from Greater China raised $119 billion, or 45% of the $265 billion in global IPO proceeds.
Outlook for 2021
The U.S. IPO market is off to a strong start in 2021, with eight new issues pricing since the beginning of the year, including two Chinese companies, and an average return of 67%. As long as investors retain their enthusiasm for riskier, high growth companies, the IPO market is likely to continue revving in high gear.
Whether this momentum is sustained throughout 2021 depends on several critical questions.
- Audit Inspection Conundrum – U.S. regulators have been seeking for years to enable the public accounting oversight board (PCAOB) to get in and inspect the work of audit firms based in China, including the China affiliates of the Big Four. Now with mandated disclosures in 2021 annual reports and the looming threat of delisting due to the Holding Foreign Companies Accountable Act, the incoming Biden administration has the opportunity to try and negotiate an acceptable framework for cooperation. China's CSRC has signaled that they are open to talk. But there are only a few months to resolve the issue before 20-F annual reports need to be filed with mandated disclosures on Communist party membership of directors and government control of listed companies.
- Homecoming IPOs – Given the uncertain regulatory landscape in the U.S., the Hong Kong stock exchange is likely to continue to benefit from secondary listings by larger, more liquid China concept stocks that are listed in the U.S. These “homecoming IPOs” not only act as a hedge against any future U.S. trading bans, but they also satisfy the apparently unslakable thirst of these companies for capital as they either invest in growth or build a war chest to make venture investments that can be spun out and listed in the future. Taking it one step further, established tech companies trading in Hong Kong such as SMIC and Lenovo have launched CDR secondary listings on Shanghai's STAR exchange to tap domestic investors' enthusiasm for China's global champions.
- Squished Ant – The planned, record-shattering $35 billion IPO of Ant Financial was meant to be a defining moment for China's domestic stock exchanges, demonstrating that Shanghai and Hong Kong have achieved world-class depth and execution capabilities. Instead, the Chinese authorities pulled the plug on the party just days before the stock was to begin trading and then announced significant new strictures on Ant's business that put the viability of a future IPO in question. This debacle was a sharp reminder to global investors that even the most established companies in China operate at the pleasure of government authorities and the Party.
- SPAC Mania – The U.S. IPO market was dominated in 2020 by offerings of SPACs, which accounted for 248 new listings and raised over $75 billion. That capital now needs to be deployed through the acquisition of private companies over the next 18 months or will be returned to shareholders. The SPAC boom scale has opened a path to capital raising and public exits that is attractive to many China-based enterprises. If these deals are consummated, it could prove to be another significant source of new listings from the region in 2021.
How will these conflicting currents play out this year?
For the moment, the U.S. market appears to be wide open to Chinese equities that possess a healthy growth profile, the ability to communicate their story to global investors, and a willingness to conform to U.S. financial reporting and governance standards. If the crop of new Chinese IPOs in 2020 delivers on these expectations, we can expect resourceful Chinese CEOs to overcome every regulatory and political obstacle to find their way to the pot of IPO gold.
