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.
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 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.
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.
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.