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Don’t judge an IPO by its cover

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By Jonathan Breen
20 Nov 2018

Babytree Group and Tongcheng-Elong Holdings hit the market with their Hong Kong IPOs at an unfortunate time and volatility forced both companies to take a knife to their fundraising targets. But their moves may pay off in the long-term.

Would Chinese firms Babytree, an online platform for young parents, and Tongcheng-Elong, an online travel agent, be able to raise more from their IPOs if they had waited until next year to kick it off? Some ECM bankers say yes, while others reckon the timing was smart, given expectations of even worse market conditions in January

Nobody has a crystal ball, but these new economy companies may have hit the nail on the head with their strategy to come out now as both Babytree and Tongcheng-Elong are after more than just funding. They want a better profile, get their name in the public eye, and work towards meeting their long-term strategies — things the market should pay attention to.

In terms of proceeds, both the firms have sacrificed a lot. The pair had looked to raise around $800m and $900m, respectively. But the latter kicked off its IPO on November 13 with a target of $230m, while Babytree followed with a goal of at most $281m. Both priced their listings this week. 

Another Chinese tech start-up is taking a similar tack. Mobvista, which helps mobile app developers acquire users through advertising and analytics, has shrunk its IPO from $400m to around $200m. But as bankers familiar with the company attest, the float, expected this week, is more about profile than immediate fundraising.

All the firms could have waited for better conditions, but the way the market is looking, that would simply be a way of kicking the can down the road.

Over the past month, Hong Kong’s stock market has been the epitome of volatility, with the Hang Seng Index falling 6% in the last two weeks of October, before rebounding by 8% early this month. After a relatively stable 10 days, the index lost 2% on Tuesday following a three-day climb.

If it is all about funding, the public equity capital market is obviously not the go-to avenue for capital as things stand. Private investors’ pockets are plenty deep, with the increasing popularity of pre-IPO fundraising this year testament to that.

To make sense of Babytree, Tongcheng-Elong and any other new economy company that may list in Hong Kong before the end of the year, investors need to take a long-term view on these firms — just like the issuers themselves. Babytree, for example, is raising capital to fund a series of acquisitions and be able to quickly take advantage of low valuations on its targets. The firm’s growth plan is based on M&A.

That the company shrunk its IPO size is not really a concern, as is the case with Tongcheng-Elong and Mobvista, if the latter takes the plunge.

Investors and bankers should not judge these issuers by the amount of capital they raise from their IPOs, but should instead focus on the companies’ long-term trajectory and objectives — and the benefits that may come with it.

By Jonathan Breen
20 Nov 2018