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Asian IPO issuers: keep your expectations in check

By John Loh
18 Sep 2018

IPOs from Asian companies have painted a mixed picture, with deals continuing to get done even as the trade war between the US and China looks set to escalate. But the incredible share debuts of Nio and Qutoutiao last week are unlikely to mark a turning point. If anything, issuers should continue to tread cautiously on pricing.

Lossmaking Chinese company Qutoutiao sprang a welcome surprise last Friday when its share price more than doubled in its first hours of trading on the Nasdaq. Investors were so exuberant that trading was halted multiple times, yet the stock gained as much as 191% at one point.

Just a day earlier, Nio had pulled off the same feat when it was listed on the New York Stock Exchange. The electric vehicle maker, billed as the Chinese equivalent of Tesla, jumped 76% on its debut.

Both stocks have since given back most of these gains. But anyone hoping for a repeat performance should learn not from their first-day pops but from their prudence.

Qutoutiao, China's second largest mobile news aggregation platform, raised $84m after selling 12m American Depositary Shares at the bottom end of a $7-$9 marketing range. It had earlier sought to raise as much as $144m from the sale of 16m ADS. But even though books were covered, Qutoutiao chose to slash its target by 42%.

Nio, thanks to its much bigger profile, was spared any cuts to its flotation size. But the $1bn IPO was nonetheless priced one cent above the floor of its $6.25-$8.25 per ADS guidance. Also, as a defence, a chunky 90% of the stock was allocated to the top 10 accounts — an unusually concentrated book for such a large fundraising.

Clearly, these concessions to investors paid off in the stocks' aftermarket performances. And as the trade war ramps up, such moves will be increasingly necessary.

The US administration ratcheted up trade tensions this week, with president Donald Trump going ahead with his threat to impose an additional $200bn of tariffs on Chinese imports at a 10% rate, which jumps to 25% next year. The latest salvo means half of China's annual exports to the US are being punished. China is expected to retaliate.

Emerging markets may look cheap after the longest Asia sell-off in years. Yet earnings projections are being revised downwards by analysts and strategists, who say Hong Kong shares are poised for more downside.

All this means the environment for new issuance will only get tougher, and companies and investors should buckle down for a prolonged sell-off in Asia.

Of course, there will still be the odd IPO that defies the trend. Haidilao International Holding, the Sichuan hotpot restaurant chain, is on track to price its listing at the top of its indicative range after a blistering bookbuild. And Meituan Dianping, the Chinese food delivery super-app, got the who’s who of Asian institutional investors to buy its shares.

But these are among the must-have deals of the season, and barring a few names the bulging pipeline of Asian IPOs expected to price before the end of the year are unlikely to attract the same level of attention.

There is no doubt IPOs will continue to get across the finish line, even as geopolitical tensions and emerging market volatility rise. But for now, issuers should temper their expectations – it’s better to tread carefully and over deliver than face the market’s wrath.

By John Loh
18 Sep 2018