US IPO market becomes a danger zone for Chinese firms

The crackdown by Chinese regulators is likely to deter companies from listing in the US and drive more to launch IPOs in Hong Kong, bankers and analysts say

(AF) Bankers say China’s stepped-up scrutiny of tech giants such as Didi that list on foreign markets has cast a shadow that is likely to reduce the number of companies seeking to launch IPOs in the United States.

Beijing said on Tuesday it would strengthen supervision of all Chinese firms listed offshore and tighten rules for cross-border data flows.

The move looks likely to depress long-term valuations of IPO-bound companies and some analysts suspect that China wants to reduce the number of its conglomerates that list abroad.

The pace of activity is expected to slow in the near-term as investors grapple with Beijing’s decision, which came days after regulators launched a cybersecurity investigation into Didi.

“It suffices to say those Chinese companies already planning to list in the US will have to pause, or even abandon the plans altogether, in the face of mounting uncertainties and confusions,” Fred Hu, chairman of Primavera Capital Group, told Reuters.

“The US market is off-limits, at least for now,” said Hu, whose private equity firm’s portfolio includes a number of tech companies that have gone public overseas. He said: “The stakes are extraordinarily high, for both the tech companies and for China as a country.”

US markets have been a lucrative source of funding for Chinese firms over the past decade. A record $12.5 billion has been raised so far in 2021 in 34 offerings from listings of Chinese firms in the US, Refinitiv data shows.

Analysts say China’s move 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 US-listed Chinese companies, down 3.4% on Tuesday.

‘CLEAR SIGNAL’

Many investors, and even Didi, were caught off-guard by the Cyberspace Administration of China (CAC)’s order on Sunday for the ride-hailing firm to remove its apps from app stores in China for illegally collecting users’ personal data.

The move came less than a week after it made its debut on the New York Stock Exchange following its $4.4 billion initial public offering – the largest Chinese IPO in the US since e-commerce giant Alibaba Group raised $25 billion in 2014.

That led to Didi’s shares diving 27% since its debut on June 30.

The CAC also announced probes into Kanzhun Ltd’s online recruiting app Zhipin and truck hailing company Full Truck Alliance.

“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 US securities regulator in March began rolling out new regulations that could see Chinese companies delisted if they do not comply with US 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, which is described as a Chinese medical data solutions provider, is currently raising up to $211 million in a US IPO and is due to price its shares after the US market closes on Thursday.

There has been no change to that timetable 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, bankers said.

Investment banking fees from Chinese offerings were worth $485.8 million so far in 2021, Refinitiv data shows. Goldman Sachs, Morgan Stanley and JPMorgan are at the top of the league table for deal volume, according to the data.

Some bankers said the regulatory clampdown will boost Hong Kong’s allure as a fundraising venue for Chinese companies looking to avoid the new restrictions for listing in the US.

Underscoring that optimism, shares in Hong Kong Exchanges and Clearing Ltd (HKEX) 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,” Steven Leung, sales director at brokerage UOB Kay Hian in Hong Kong, said.