Analysis: U.S. IPO market a danger zone for Chinese firms after Beijing crackdown
07/07/2021 10:54
By Scott Murdoch, Kane Wu and Echo Wang
HONG KONG/NEW YORK, July 7 (Reuters) - China's stepped-up
scrutiny of overseas listings by its companies and a clampdown
on ride-hailing giant Didi Global Inc DIDI.N soon after its
debut in New York have darkened the outlook for listings in the
United States, bankers and investors said.
On Tuesday Beijing said it would strengthen supervision of
all Chinese firms listed offshore and tighten rules for
cross-border data flows, a sweeping regulatory shift that is
also set to weigh on the long-term valuations of the IPO-bound
companies, they said.
Bankers and investors expect the pace of activity to slow in
the near-term as investors grapple with Beijing's decision to
tighten supervision of firms listed offshore, coming just days
after regulators stunned investors by launching a cybersecurity
investigation into Didi. urn:newsml:reuters.com:*:nL2N2OI0SQ
"It suffices to say those Chinese companies already planning
to list in the U.S. will have to pause, or even abandon the
plans altogether, in the face of mounting uncertainties and
confusions," said Fred Hu, chairman of Primavera Capital Group.
"The U.S. market is off limits, at least for now," said Hu,
whose private equity firm's portfolio include a number of tech
companies that have gone public overseas. "...The stakes are
extraordinarily high, for both the tech companies and for China
as a country."
U.S. capital markets have been a lucrative source of funding
for Chinese firms in the past decade, especially for technology
companies looking to benchmark their valuations against listed
peers there and tap an abundant liquidity pool.
A record $12.5 billion has been raised so far in 2021 in 34
offerings from listings of Chinese firms in the U.S., Refinitiv
data shows, well up from the $1.9 billion worth of new listings
in 14 deals in the year-ago period.
Analysts say China's moves to look more closely at firms
venturing overseas add a new layer of uncertainty for firms
already struggling to navigate escalating tensions between
Beijing and Washington over a broad range of issues.
"The message is that for a successful overseas listing,
Chinese regulators must be involved, as well as international
cooperation with overseas regulatory bodies," said Louis Lau,
California-based Brandes Investment Partners' director of
investments.
"Overseas-listed Chinese companies may have had the mistaken
impression that it can ignore Chinese regulators just because
they are not listed in China," Lau, whose company holds Chinese
stocks, told Reuters.
The broader regulatory clampdown and Didi's listing dustup
drove the S&P/BNY Mellon China Select ADR Index, which tracks
the American depositary receipts of major U.S.-listed Chinese
companies, down 3.4% on Tuesday.
'CLEAR SIGNAL'
Catching many investors, and Didi, off-guard, the Cyberspace
Administration of China (CAC) on Sunday ordered the ride-hailing
firm to remove its apps from app stores in China for illegally
collecting users' personal data, less than a week after it made
its debut on the New York Stock Exchange following its $4.4
billion initial public offering. urn:newsml:reuters.com:*:nL3N2OC33T
It was the largest Chinese IPO in the U.S. since e-commerce
giant Alibaba Group BABA.N raised $25 billion in 2014.
For investors, the euphoria was shortlived, with Didi's
shares diving 27% since its debut on June 30.
urn:newsml:reuters.com:*:nL2N2OI22A
The CAC also announced probes into Kanzhun Ltd's BZ.O
online recruiting app Zhipin and truck hailing company Full
Truck Alliance YMM.N .
"It's a clear signal that the Chinese government is not
particularly happy that these firms continue to decide to raise
capital in the west," said Jordan Schneider, a technology
analyst at research firm Rhodium Group.
The measures come as the U.S. securities regulator in March
began rolling out new regulations that could see Chinese
companies delisted if they do not comply with U.S. auditing
rules.
BOOST FOR HONG KONG
While the latest crackdown has dimmed the outlook for large
Chinese IPOs in New York, not all companies are rushing to pull
their ongoing offerings just yet.
LinkDoc Technology Ltd LDOC.O , which is described as a
Chinese medical data solutions provider, is currently raising up
to $211 million in a U.S. IPO and is due to price its shares
after the U.S. market closes Thursday.
There has been no change to that time table yet, according
to two sources with direct knowledge.
LinkDoc did not immediately respond to a request for
comment.
Wall Street banks, which have benefited from Chinese firms'
rush to list in New York in recent years, are also expected to
take a hit on their fee income in the near-term, according to
bakers.
Investment banking fees from Chinese offerings were worth
$485.8 million so far in 2021, Refinitiv data shows. Goldman
Sachs GS.N , Morgan Stanley MS.N and JPMorgan JPM.N are at
the top of the league table for deal volume, according to the
data.
Goldman Sachs declined to comment while Morgan Stanley and
JPMorgan did not respond.
Some bankers said the latest regulatory clampdown will
further boost Hong Kong's allure as a fundraising venue for
Chinese companies looking to avoid the new restrictions for
listing in the United States.
Underscoring that optimism, shares in Hong Kong Exchanges
and Clearing Ltd (HKEX) 0388.HK rose as much as 6.2% on
Wednesday, and was the second most actively traded stock by
turnover.
"Buying is fueled by an expectation that HKEX may become the
only IPO center for Chinese firms seeking listing and the main
center for raising foreign capital," said Steven Leung, sales
director at brokerage UOB Kay Hian in Hong Kong.
(Reporting by Scott Murdoch & Kane Wu in Hong Kong and Echo
Wang in New York, additional reporting by Zoey Zhang in Shanghai
and Donny Kwok in Hong Kong Donny W; Writing by Anirban Sen;
Editing by Sumeet Chatterjee & Shri Navaratnam)
((Scott.Murdoch@thomsonreuters.com;))