China IPOs expected to attract investors

• Several Chinese tech unicorns are angling to go public in 2018.
• Global stock exchanges, including the NYSE, Nasdaq, and HKSE, are vying for China's public offerings.
• According to Renaissance Capital, 137 Chinese companies went public last year, raising a total of $32.2 billion.
• In 2017, $3.4 billion was raised on U.S. exchanges through the initial public offerings of 16 Chinese companies.

This year, several Chinese tech unicorns, including Xiaomi, may go public with multibillion-dollar offerings, increasing investor interest in China's technology sector. New York and Hong Kong are competing for these listings, and the stakes are high, with deals worth more than a quarter-trillion dollars at risk.

According to David Williams, founder and CEO of Williams Capital Advisors in Palo Alto, if these China tech companies begin trading, they could collectively surpass the market capitalization of a few hundred billion dollars or more.

According to Matt Kennedy, an analyst at Renaissance Capital, this year could witness an increase in China IPOs, particularly in mega offerings.

In 2019, 137 Chinese companies went public, raising a total of $32.2 billion. Among the top performers were tech IPOs, such as Apple supplier, which raised $347 million at a valuation of $2.3 billion, and Tencent-backed China Literature, which raised $1.1 billion at a valuation of $6.4 billion. Both companies listed on the Hong Kong Stock Exchange.

In 2017, sixteen Chinese firms raised $3.4 billion on U.S. exchanges, more than double the amount in 2016, according to Renaissance Capital. Notable among them were Sogou, a mobile search engine backed by Alibaba; five Chinese online lenders, including Qudian and PPDai; Best, a logistics firm backed by Tencent; and four education companies, including Bright Scholar Education.

In 2018, Chinese private fund assets reached a remarkable $1.63 trillion.

The Chinese IPO pipeline is still strong, with momentum building for Xiaomi, the Beijing-based maker of the popular Mi smartphone series, to list on the HKSE in the second half of 2018 at a valuation of about $50 billion, according to some reports.

Chinese tech companies backed by unicorn funds may soon follow suit with IPOs, including Didi Chuxing, Meituan-Dianping, ByteDance, Ant Financial, Lufax, China Tower, and Sinopec Marketing, according to investment banking and venture capital sources.

An exchange showdown

The traditional home for China's new economy company IPOs is New York, particularly those with international footprints or overseas expansion strategies and ambitions. Alibaba's $25 billion IPO in 2014, which saw the e-commerce giant snub the Hong Kong Stock Exchange and list on the big board, was its biggest win and breakthrough.

Generally, being the world's largest market, New York provides higher valuations, a greater pool of tech-savvy investors, a more adaptable listing system with dual-class shares, and prestige.

Hong Kong's appeal lies in its proximity to China, its favorable time zone for Asian business executives, and the Stock Connect schemes linking trading in Shanghai and Shenzhen with Hong Kong, which can attract Chinese interest once shares have been listed. However, the links do not currently allow IPO investments.

Hong Kong is actively working on reforms to attract China's tech giants, such as allowing dual-class shares and permitting pre-revenue biotech companies to list. These measures aim to reduce short-term investor pressure and focus on strategic growth. Hong Kong's new listings rules, which could be implemented in June, also allow secondary listings of innovative companies already listed in the US and UK.

Hong Kong faces challenges in attracting Chinese tech founders who have traditionally preferred Nasdaq or NYSE for international recognition and prestige. "New York has long been viewed as the ultimate IPO destination among Chinese entrepreneurs," said Hans Tung, managing partner of GGV Capital. "Now, Hong Kong is making efforts to become more business-friendly. It will be up to Hong Kong to lose this advantage."

Venture-backed Chinese tech titans are in high demand among exchanges, and their private equity and venture capitalist backers are eager to liquidate their investments made several years ago in China's emerging technology players.

The primary factor to consider when making listing choices is public market valuation. Didi Chuxing, the world's second most valuable unicorn technology company (after Uber), has funding from Matrix Partners, Tiger Global, and SoftBank, valuing it at a staggering $56 billion. Didi is planning an IPO in New York that could occur this year or next, according to informed US-China venture sources. Currently, the company serves 400 cities in China.

An attractive swing factor for one of the New York exchanges could be Didi's plan to expand its business overseas. Last year, Didi established an international division and an R&D lab in Mountainview, California, to develop A.I. and self-driving technology. Additionally, China's online content platform ByteDance, the company behind the unicorn-valued news app Toutiao, may list in New York following its recent near-$1 billion acquisition of U.S. video-sharing app Musical.ly.

Dual-class listings

The possible IPO of Xiaomi on the HKSE later this year could benefit from pending reforms. The changes come after the Hong Kong exchange lost the $25 billion IPO of e-commerce giant Alibaba to the NYSE in 2014 due to issues related to the dual-class voting structure. "Alibaba became the largest global IPO, and its market cap astounded the Hong Kong government, prompting them to make changes," said VC investor Tung at GGV Capital, a lead early investor in Alibaba.

Charles Li, CEO of HKSE, a former financial executive with J.P. Morgan China and Merrill Lynch, has been head of the exchange since 2010. He believes that there is a need for greater recognition and understanding of the needs of the region’s capital market. Pressure has been building to make it easier to list in Hong Kong. Recently, Li noted that there is a clear consensus that capital market access in Hong Kong should be broadened to maintain the city’s role as a leading international financial center.

Hong Kong in transition

The advantages of listing on the HKSE for emerging tech companies from China include being close to mainland China, investors being familiar with the company's products, and compatibility with language and time zones.

Xiaomi CEO Lei Jun, known as China's Steve Jobs for his black T-shirt and jeans attire at product launches, struggled with English language skills and rarely spoke just a few years ago. Despite being popular in China and Southeast Asia, Xiaomi products are not well-known in the United States.

An investment banker argued that a company may receive a higher valuation if its business is comprehended by individuals.

In 2017, the NYSE had the most IPOs with 68, followed by Nasdaq with 110, while Hong Kong had the second-largest number of IPOs with 142. In terms of volume, the NYSE had the highest with $26 billion, followed by Nasdaq with $14.1 billion, and Hong Kong with $12.4 billion.

In 2017, the London Stock Exchange and its SME Growth Market had a total of 155 IPOs worth $39.3 billion in volume, compared to 128 IPOs worth $28.4 billion in 2016.

The London Stock Exchange is also trying to attract China tech IPOs, as it recently welcomed Chinese bicycle sharing unicorn Ofo to the U.K, where the Beijing-based start-up has been expanding rapidly.

Hong Kong's listing requirements are already prompting changes, as some companies that had previously considered a New York listing have switched and are now planning a Hong Kong listing. If the listing reforms are formally enacted, we expect this trend to pick up, said Kai Fang, managing director and head of China Equity Capital at investment bank China Renaissance in Hong Kong.

The positive outlook for HKSE as a hub for technology companies was highlighted by the recent wave of successful IPOs in Hong Kong's tech sector during the second half of 2017. According to a year-end IPO report by KPMG, four of the ten largest IPOs in Hong Kong last year were in the tech sector and all were heavily oversubscribed by local investors, recording first-day trading gains.

In November 2017, Tencent's e-book unit China Literature experienced a 86% increase in shares during its public debut, raising $1.1 billion. The same month, PC gaming company Razer attracted more than $504 million with pricing up 41% on the initial day of trading. In September 2018, online insurance company ZhongAn raised $1.5 billion on the HKSE, Hong Kong's second-largest IPO last year and Asia's largest fintech IPO.

— By Rebecca Fannin, special to bizfocushub.com

An inaccuracy about Xiaomi and the IPO market has been corrected in this article.