Chinese appetite for US IPOs still strong

Trade issues aside, Chinese companies are still looking to list their shares in the US.

"Despite the heated talk on trade, I remain an optimist about US-Chinese relations, economic and otherwise," said Drew Bernstein, co-head of the China practice at Marcum Bernstein & Pinchuk and an auditor of Chinese IPOs in the US. "I can tell you that we are getting more inquiries about US IPOs from China right now than at any time in recent memory."

Chinese initial public offerings in the US accounted for about a fifth of US IPO proceeds in the first quarter this year, according to Renaissance Capital, an IPO research firm based in Connecticut.

"There are several factors that make a US listing attractive to Chinese companies," said Bernstein. "Time to market can be much faster, given that IPOs need to meet disclosure requirements but are not subject to government approval and don't have to wait in line.

"And pricing is set by market demand, rather than a formula based on historical earnings, so for high-growth companies that recently became profitable, they can often get higher valuations since they price on future earnings and cash flow," Bernstein added.

"The US also has very active, liquid markets for follow-on equity and debt offerings. As long as a company performs financially, they can return for multiple rounds of funding at a lower cost of capital," Bernstein said. "And a US listing can be a great platform if a company plans to expand internationally, since you now have consumer brand recognition and a currency to make acquisitions overseas."

Matt Kennedy, IPO market strategist at Renaissance Capital, said "there is a backlog of Chinese IPOs there pending approvals, there are several restrictions in place. And the dynamics in China seems to favor investors rather than the issuers."

However, Kennedy said the performance of Chinese IPOs so far this year is disappointing.

"Looking at the eight companies that have listed in the US, six of them have a negative return; the two positive ones (microcaps) have raised less than $15 million; also, investors are not making money on Chinese IPOs," he added.

"We continue to see a wide spectrum of the readiness of teams to truly be successful as US public companies," Bernstein said. "That is why when I talk to Chinese CEOs, I always frame this as training for a marathon while running a sprint. You don't want to be that broken IPO that does only one financing, and two years after the opening bell trading has dried up, analysts dropped you, and institutional funds have fled."

Kennedy said that in 2017 and in the first quarter of 2018, Chinese IPOs in the US hit a multiyear high, but that changes in China's exchanges could affect that.

He mentioned that the Chinese mainland tech company Xiaomi at one point was considering listing in the US but submitted its application for an initial public offering in Hong Kong last week.

"Everyone is fixated right now on the changes that Hong Kong has made to its listing standards to accommodate dual-class shares so as to be able to attract the big China tech unicorns," Bernstein said. "While I do think this makes Hong Kong more viable at the margin, there are a whole host of factors that go into choosing the best listing venue, and dual-class now creates a level playing field between US and HKE."

Bernstein added that there is a lot of talk also about the potential for CDRs (China depositary receipts) to enable the Alibabas and Tencents to tap into Chinese shareholders.

China's securities regulator on May 4 published draft rules on the issuance of CDRs, paving the way for domestic flotation of offshore-listed tech giants and the launch of a cross-broader link of exchanges in Shanghai and London.

The rules on CDRs, modeled after American depositary receipts (ADRs), came days after the Hong Kong stock exchange adopted new rules to broaden its listing regime, intensifying a battle for listing resources. Both Beijing and Hong Kong are targeting the likes of Baidu, Alibaba Group and JD by allowing them to list at home via secondary listings.

The rules "lay the foundation for innovative companies to return to the domestic capital markets via the issuance of CDRs", the China Securities Regulatory Commission (CSRC) said on its website.

"There are a lot of technical issues that would need to be ironed out, but I think that giving Chinese national investors access and some skin in the game is ultimately a positive," Bernstein said. "If CDRs were to become more broadly available, it will make the Chinese government more concerned with investor protections and the accuracy of accounting information that these companies are publishing to investors. That would be a very positive development."

Kennedy sad that "there are some headline risks that impact returns in valuations I can see that are affecting Chinese IPOs in the US, but I don't see any US policies that have real impact on that".

"The trend (of Chinese IPOs in the US) will be more uncertain in the rest of the year. And there is an upcoming Chinese IPO called Huya (a livestreaming platform for video and e-sports); we will see whether it could reverse the trend of negative performances earlier this year."

Reuters contributed to this story.

ruinanzhang@chinadailyusa.com