Over 20 Chinese companies have already raised $5.23 billion in U.S. IPOs this year
Despite China and the U.S. being embroiled in a trade war for more than 2 years, and the tightening of IPO filing restrictions and guidelines, a slew of Chinese companies are racing to go public in the U.S., with 6 Chinese firms filing for IPOs in the U.S. last week.
Chinese electric vehicle and autonomous driving system developer Xpeng Motors raised nearly $1.5 billion in its New York Stock Exchange debut late last month in one of the most notable U.S. IPOs by Chinese startups, surpassing its initial plan to raise $1.11 billion.
The Chinese Tesla rival’s U.S. IPO was the second Chinese EV maker to go public this year – Li Auto, a Chinese EV SUV maker, debuted on Nasdaq in late July, and raised $1.1 billion from the public market along with $380 million through a private placement.
The trend of filing for IPOs in the U.S. by Chinese companies show no signs of slowing despite deteriorating trade relations and regulatory restrictions. Understanding their motivations is no simple task, but analyzing all that has happened so far could provide a window into their decision-making for other startups considering listing on U.S. exchanges.
A brief overview of the power tussle between China and U.S.
U.S. President Donald Trump accused China of unfair trade practices, intellectual property (IP) theft, and threatened to impose taxes and tariffs as early as his 2016 Presidential election campaign rallies back in June 2016.
In March 2017, Trump called for tighter tariff enforcement, following which he met with Chinese President Xi Jinping and agreed to a 100-day plan for trade negotiations to reduce the U.S. trade deficit with China.
After the trade agreement talks fell through, the U.S. terminated three bilateral agreements with Hong Kong, subjecting Hong Kong goods to U.S. taxes, and Trump issued a Presidential memorandum to investigate IP theft charges against China. This started a tit-for-tat tariff war over the following months where both nations went on to impose tariffs on billions of dollars of each other’s goods.
While trade negotiations were rekindled in December 2018, Beijing backtracked from the agreement in March 2019, and the ever-escalating tariff war resumed.
According to a report by China Briefing, the U.S.-China trade war has resulted in the imposition of tariffs on US$550 billion wroth of Chinese goods while China has imposed tariffs on roughly $185 billion worth of U.S. goods.
The ongoing trade war has been hurting not only the businesses of both countries but also the global economy, and the International Monetary Fund (IMF) Managing Director Kristalina Georgieva warned in 2019 that the continuation of the trade war could lead to the loss of $700 billion for the global economy by 2020.
According to a report by Pricewaterhouse Coopers China, the world’s two largest economies may be heading towards a ‘Thucydides trap,’ a term used to refer to the ancient Greek historian Thucydides, who suggested that an emerging power will always challenge the established power, leading to inevitable conflict.
In short, this could mean that the trade disputes between the two economic giants could be a precursor to a full-blown competition on other, more destructive fronts.
Impact on Chinese Tech Startups
Trade tensions between the U.S. and China have been escalating ever since Trump entered office in 2017. Not only have the tariffs implemented by both countries forced businesses to rethink their business strategies and markets, but the trade dispute has also directly impacted several Chinese tech companies who have been added to the U.S. ‘entity list.’
This list identifies companies that are believed to pose a threat to the national security of the U.S., and imposes additional restrictions upon them or outright bars them from doing business with U.S. companies.
Starting with a ban against Huawei in May last year, the entity list now contains well-known Chinese tech startups including artificial intelligence (AI) unicorns SenseTime and Alibaba-backed Megvii, video surveillance startup Hikvision, drone developer DJI, and ByteDance’s social media app TikTok among others.
This has begun the decoupling of the two biggest economies, as they break ties and China races to become self-sufficient in light of sanctions imposed by the U.S. to restrict China’s access to U.S. technology.
As a result of the U.S. ban on the sale of high tech products to Chinese companies, China has ramped up its efforts to produce its own semiconductors, driverless cars, artificial intelligence, and other technologies, The New York Times reported.
The trade disputes have also led Chinese companies to explore potential markets away from the U.S., and business relationships between U.S. and Chinese companies have fallen through with canceled contracts, banned products, and blocked investments.
Impact on U.S.-listed Chinese companies
Amid the chaos, recent scandals and frauds perpetrated by U.S.-listed Chinese companies like Luckin Coffee, which inflated almost 40% of its annual sales records and was delisted from Nasdaq, and Kingold Jewelry, which allegedly secured $2.8 billion in loans with counterfeit gold as collateral and later voluntarily delisted from Nasdaq, have attracted increased scrutiny on Chinese companies listed in the U.S.
In May, the U.S. Senate unanimously passed a bill that could prevent some Chinese companies from being listed in the U.S., and could result in the delisting of nearly 800 Chinese firms. The bill requires U.S.-listed companies to certify “they are not owned or controlled by a foreign government,” and be subjected to audits by U.S. regulators for three consecutive years.
Failure to comply with U.S. accounting standards by 2022 could lead to delistings of Chinese firms including tech giant Alibaba, which debuted on the Nasdaq exchange in 2014 in a $20 billion IPO, and search giant Baidu.
However, despite the uncertainty and the looming threats, Chinese startups are flocking to the U.S. for listings on Nasdaq or the New York Stock Exchange.
Chinese tech startups still keen on U.S. listings
The White House Task Force recommended early last month, that all future IPO applicants need to allow a review of their audit records by U.S. regulators as a prerequisite to being listed on U.S. exchanges.
Despite the uncertainty and escalating power scuffle between U.S. and China, U.S. stock exchanges are still favored by Chinese startups planning to go public. In 2019, 25 Chinese companies listed on the U.S. stock exchanges through IPOs, while three companies went public through special purpose acquisition companies (SPACs), according to data from Renaissance Capital.
Up till August 13, 2020, over 20 Chinese companies had raised $5.23 billion in U.S. IPOs this year, more than the total of $3.5 billion raised by 25 Chinese companies last year, The Wall Street Journal reported in August.
The article further quoted Aaron Arth, Head of Asia ex-Japan Financing Group at Goldman Sachs saying, “There is no doubt that people have an eye open to the risks posed by geopolitical and regulatory uncertainty, but there has been no change, no dampening of appetite or demand at this stage.”
According to Bloomberg data, Chinese companies like Angora, Genetron, Burning Rock Biotech, and Legend Biotech Corp, have priced their IPOs above their range, indicating a strong demand for healthtech and biotech companies in light of the global pandemic.
Moreover, PitchBook reported Drew Bernstein, Co-chairman at Marcum Bernstein & Pinchuk, which audits Chinese companies in the U.S., as saying, “It’s not like Chinese [companies] are just coming [to the U.S.]. They’re actually being brought here by investment banks and other professionals.” His statements further validate U.S. investor interest in Chinese companies.
According to a report by CNBC, many Chinese companies have been forced to postpone their listing plans in the U.S. amid the global pandemic and rising trade tensions, but the keyword here is ‘postpone.’ The report further states that Chinese companies’ plans to go public in the U.S. have been delayed, rather than canceled.
Why U.S. listings are preferred by Chinese tech companies
One of the primary reasons why Chinese tech companies prefer U.S. listings is because they provide access to an international investor base and better branding opportunities in an international market, which is why the WSJ referred to U.S. listings as ‘The Gold Standard.’
The value of Chinese companies listed on U.S. exchanges is equal to 53% of the total value of the Shenzhen market, 45% of the value of the Shanghai market, and 24% of the value of Shenzhen and Shanghai combined, Forbes reported.
With a combined market capitalization of over $36 trillion, the U.S. stock exchanges provide Chinese companies access to a market that is three times larger than the Shanghai and Shenzhen markets combined.
According to another Forbes article, going public in the U.S. also garners better media and analyst coverage for the Chinese companies, and increases their liquidity and shareholder base. Moreover, the article contends that listing in the U.S. can lead to increases in valuation and decreases in cost of raising both equity and debt capital.
Chinese Companies Flock to U.S. for IPOs
On September 8, Bain Capital-backed Chinese data center operator ChinData Group filed for a U.S. IPO on the Nasdaq exchange. The firm plans to raise approximately $400 million, according to Reuters.
The company plans to use 80% of the proceeds from the IPO for development and construction of new data center projects with 20% allocated for potential investments and acquisitions, Reuters added.
It also added that Morgan Stanley & Co and Citigroup Global Markets will act the as the joint bookrunners for the deal with UBS Securities and China Renaissance Securities as underwriters.
Founded in 2015, Beijing-headquartered ChinData is one of the largest hyperscale data center providers, and was acquired by Bain Capital in May 2019 for $570 million, and merged with Bridge Data Centers in July last year. The startup focuses on China, India, and Southeast Asia.
Last month, SK Holdings, the parent of South Korean conglomerate SK Group, acquired 8.9% stake in ChinData for $300 million, in a deal that valued the company at $3.1 billion.
The same day, Chinese voice-chat app Yalla Group filed for an IPO on the NYSE with Morgan Stanley and Haitong International as the underwriters, according to a report by Deal Street Asia.
In addition to chat services, Yalla also offers in-app games, and received an average of almost 12.5 million users on its platform each month in Q2 2020. These users logged 309.5 million hours in Yalla’s live voice chat rooms (“Yalla rooms”), and played a total of 407.2 million rounds of casual games on Yalla Ludo, according to the prospectus.
According to SEC filings accessed by Jumpstart, the 2016 founded startup, which considers the Middle East and North Africa (MENA) as its main market, will use the capital raised from the offerings to market and promote its brand and expand its customer base, further develop technological infrastructure to enhance user experience and increase efficiency of its app, and for potential acquisitions.
Yalla reported net profits of $25.2 million over a revenue of $52.8 million in the first half of 2020. The startup claims to be the largest voice-centric social networking and entertainment platform by revenue last year in MENA, with 5.4 million paying customers at the end of Q2 2020.
Bloomberg had reported Yalla’s plans of a $100 to $200 million U.S. IPO in October last year, although the financial details of the offering are yet to be announced.
Chinese child edutainment startup iHuman filed for a NYSE IPO last week at $100 million, a placeholder amount that is likely to be changed later, according to a news report by DSA.
Founded in 2016, iHuman provides interactive and self-directed learning apps, learning materials and smart learning devices for children aged between 3 and 8 years. The startup deploys advanced game technologies, AI technologies and big data analysis to provide superior user experience, and leverages its insights in China’s child education sector and technological strength in gamification and animation to offer high-quality original education content, iHuman said in its prospectus.
According to the startup’s SEC filings, iHuman’s total revenues nearly doubled from RMB 131.9 million in 2018 to RMB 218.7 million (approximately $32.2 million at current rates) in 2019, with losses reaching RMB 275.6 million ($39 million approximately). In the first 6 months of 2020, the startup accumulated net income of RMB5.6 million ($800,000 approximately), the filings show.
The filings also show that the startup plans to use the proceeds from the offering to expand its product and service offerings in China and overseas markets, to improve technological infrastructure, marketing and brand promotions, and for development of existing products and services.
Chinese online pet products and services platform Boqii filed for an IPO in the NYSE to raise $115 million, a placeholder amount that will likely be replaced later, according to a news report by Morning Star.
The startup is backed by China Merchants Bank Co. and Goldman Sachs Group Inc., who hold 16.3% and 10.2% stake in Boqii respectively, the report noted.
A Renaissance Capital report states that Boqii is China’s largest pet-focused platform by revenue and number of customers. Founded in 2008, the company has delivered over 43.2 million online orders since its inception, and generated $120 million in revenue for the year ended June 30, 2020, the report noted.
The startup has also created a chain of physical pet stores and pet hospitals, and had approximately 23.0 million registered users as of December 31, 2019, its SEC filings show.
Intelligent Living Application Group
Hong Kong-headquartered Intelligent Living Application Group (ILAG), which sells mechanical locks and smart security systems, filed to list on Nasdaq to raise up to $19 million, according to SEC filings submitted by the company last week.
The company generates 98% of its revenues from the U.S. market, while the remaining amount comes from sales in Canada, Australia and China, ILAG said in its prospectus. While the company has been researching for smart locks for the last 2 years, ILAG has not achieved much progress owing to the U.S.-China tariff war and the global pandemic, the company added.
According to a report by Renaissance Capital, ILAG bagged $11 million in sales last year.
ILAG’s filing also noted that it has chosen to list in the U.S. since the real estate collateral preferred by traditional Chinese commercial banks makes it difficult for ILAG to raise sufficient capital for new product and market development. The company added that it has also evaluated listing in Hong Kong but believes it is difficult for industrial companies to raise financing in the Hong Kong capital market.
Lixiang Education Holding
Chinese private primary and secondary education service provider Lixiang Education Holding also filed for a U.S. IPO last week, SEC filings show. The company plans to raise up to $30 million and aims to trade on Nasdaq.
The Zhejiang-based company generated $23 million in revenue for the 12 months ended June 30, 2020.