China unicorns' valuations slide as virus-fearing investors seek early exits

China Renaissance Holdings

15/04/2020 09:07

By Julie Zhu and Yingzhi Yang
    HONG KONG/BEIJING, April 15 (Reuters) - Valuations of
Chinese unicorns have fallen below levels reached in the firms'
most-recent fundraising rounds, secondary market offerings by
existing investors show, highlighting the strain on backers amid
the coronavirus outbreak and volatile markets.
    Potential acquirers of privately held shares have been more
actively approached about buying into the billion-dollar
startups since China started reporting high numbers of virus
cases in February, said two investors offered such shares.
    Face recognition technology developer SenseTime, backed by
Japan's SoftBank Group Corp  9984.T , and DJI, the world's
largest commercial drone maker, have seen valuations fall 10%
since funding rounds in June 2019 and April 2018 to $6.84
billion and $14.5 billion based on secondary market offerings,
the people said.
    Stakes in online education provider VIPKID, backed by
Tencent Holdings Ltd  0700.HK , and bike-share firm HelloBike,
backed by Ant Financial  ANTFIN.UL , have also been offered at
reduced valuations. VIPKID's $3.95 billion represents a 15%
discount while HelloBike's $3.2 billion is 20% lower, said the
people.
    HelloBike, DJI and SenseTime declined to comment on the
secondary market valuations. VIPKID did not respond to a request
for comment.
    The change in direction for China's once-buoyant private
market comes as investors fear that takeovers and initial public
offerings (IPO) - common ways of realising profit from early
investment - will be harder to achieve, or at best take longer
partially due to the coronavirus-induced economic downturn.
    The coronavirus outbreak has greatly interrupted economic
activity, prompting financial and corporate investors to exit
investments early to ease liquidity pressure.
    "Two years ago, we were joking 'cash is trash', but now cash
is definitely king," said Robert Qiu, chief executive of Unicorn
Selected, a Chinese platform focusing on private equity's
secondary trading market.
    "Some investors see no immediate way to exit through stock
markets, but they need cash at hand so they're turning to sell
shares in secondary markets."
    Secondary trades are usually conducted through platforms
such as Unicorn Selected, or marketed by well-connected bankers
and corporate lawyers.
    Venture capital investors exited 25 Chinese deals valued at
$13.36 billion in the first quarter of 2020, versus just nine
worth $5.34 billion in the same period last year, showed data
from PitchBook.
    Venture funding in Chinese firms also dropped 33% to $8.39
billion over the same period.
    
    IPO BLOW
    While not all valuations are falling, investors are frank
about difficulties they face, particularly in industries such as
catering, retail and tourism that have been hardest hit by
restrictions on movement aimed at stopping the virus spreading. 
    "Our portfolio firms face significant challenges. Many are
seeing revenues drop, which will have a massive impact on their
cash flow," said David Tang, a partner of venture capitalist NGP
Capital.
    Investor confidence in Chinese unicorns has also been
weakened by Nasdaq-listed Luckin Coffee Inc  LK.O , a
self-declared challenger to Starbucks in China, which earlier
this month said some of its 2019 sales were fabricated. 
    Luckin's shares, which floated in May, fell more than 80% on
the news. Trading of the shares has been halted since April 7.
 urn:newsml:reuters.com:*:nL4N2BR218
    "The Luckin scandal will likely put a temporary freeze on
U.S. IPOs by Chinese companies. Global investors will become far
more cautious about investing in such companies," said one
senior China-focused investment banker at a Wall Street bank.
    Shareholders in Chinese unicorns are also worried that soggy
performance of many Chinese listings in the United States could
also dent their portfolio firms' IPO prospects.
    While the Nasdaq Composite has gained 15.2% over the past
two years, the Nasdaq Golden Dragon China Index  .HXC , which
tracks Chinese firms listed on the exchange, has dropped by the
same amount.
    "Some existing investors now would rather exit earlier than
wait any longer for portfolio firms to go public," said Zhou
Liang, head of UniSharesClub, a private shares trading platform
of investment bank China Renaissance  1911.HK . "A bird in the
hand is worth two in the bush."

 (Reporting by Julie Zhu in Hong Kong and Yingzhi Yang in
Beijing; Additional reporting by Samuel Shen in Shanghai;
Editing by Jennifer Hughes and Christopher Cushing)
 ((julie.zhu1@thomsonreuters.com; +852 2843 6519; Reuters
Messaging: julie.zhu1.thomsonreuters.com@reuters.net))