China-to-US IPOs: more pain coming
China's latest crackdown of three of its technology companies has a clear message for firms looking to list in the US — and investors wanting to buy their shares.
The Chinese authorities have once again ramped up their crackdown of technology companies from the country.
The latest targets were Didi Global, Full Truck Alliance Co (FTA) and Kanzhun. All three are linked to the tech industry. Didi is a ride hailing firm that controls almost all of the market in the Mainland; FTA is an Uber-like service for truckers; while Kanzhun runs Boss Zhipin, a popular online recruitment platform.
But more importantly, all three firms recently listed in the US. Didi debuted last week on the New York Stock Exchange, after raising $4.4bn from its listing. FTA started trading on the NYSE in June after bagging $1.57bn from its IPO, while Kanzhun, which took $912m from its deal, debuted on the Nasdaq in June.
In its announcements over the weekend, China’s internet regulator ordered Didi be removed from app stores, and demanded both FTA and Boss Zhipin to stop new user registration while it reviews their businesses.
China's focus on these three companies is not much of a surprise, given how vocal the authorities have been in the past year on reigning in firms linked to collecting data, as they put emphasis on greater oversight of data security.
But the timing of the crackdown is what matters — and sends a clear message to the market: that China’s technology companies should think twice before going ahead with their US IPOs, and that investors should be prepared to feel the pain of any regulatory changes.
It's not the first time China has flexed its muscles with its corporations.
In November 2020, it forced Ant Group to pull a landmark dual IPO at the eleventh hour. The listing, on the Hong Kong and Shanghai’s Star market, would have been the largest in history.
It has since come down hard on both Ant and its parent Alibaba Group Holding, an e-commerce giant also listed in the US. China’s State Administration for Market Regulation slapped Alibaba with a fine of about $2.8bn in April this year for alleged violation of anti-monopoly laws, while pushing fintech firm Ant to restructure its business.
While Didi, FTA and Kanzhun all managed to pull off their IPOs successfully, investors are starting to feel the pain.
Didi plunged about 20% to $12.49 on Tuesday trading — below its IPO price of $14.00 — after US markets opened following the Fourth of July holiday on Monday. FTA slipped 6.7% to fall below its listing price, while Kanzhun declined by 16%, but is still above its IPO price.
What does this mean for other tech companies waiting in the wings for US IPOs, for the banks set to reap the benefits of running some of these planned trades and the investors that have until now gobbled up such firms’ growth stories? The answer is bleak.
It doesn’t help that China’s State Council said on Tuesday that it plans to revise rules for overseas listings and will hold publicly-traded firms accountable for keeping their data secure. It additionally said it will boost oversight of companies trading offshore.
This comes at a time when the pace of US listings of Chinese companies was stepping up. Mainland issuers have raised nearly $13bn from IPOs in the US so far this year through 37 deals — much higher than the 19 deals worth $2.8bn during the same time in 2020, shows Dealogic.
A large number of firms also made first-time filings with the US Securities and Exchange Commission in the second quarter, showing a hefty pipeline of deals for the rest of the year — provided they are brave enough to tap the market.
ECM bankers should be wary of the until-now hot China-into-US IPO market. The tap could turn off as quickly as it opened — especially given companies are not just facing pressure from their own government, but also from the US regulators.
The pressure on China tech that began during former US president Donald Trump’s reign has continued. Current president Joe Biden has, to a large extent, kept the momentum going, with US-listed international firms risking a delisting if they don’t supply US-audited financial information to regulators.
Investors too should tread cautiously. It may be tempting to seize the opportunity to buy exciting growth stocks — especially as Didi, FTA and Kanzhun are all backed by high profile tech firm Tencent Holding, with Japan's Softbank also a key shareholder in FTA. But the long-term ramifications, and in some cases the short term, may be difficult to handle.
More pain is likely on the way for investors, investment banks and companies hoping to list in the US.
Discounted valuations may be one way to still appeal to investors, but whether issuers will be willing to swallow lower valuations — and whether buyers will be willing to take on the risk that investing in China stocks could entail — is a big question.
China's regulators have sent their message loud and clear to firms gunning for US listings. Whether the message has been received will become evident before long.