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Asia CommentGC Asia View

No big bang for China-into-US IPOs

Chinese IPOs come with a certain amount of baggage

Life is slowly returning to the China-US listings market, but ECM bankers will need to adapt to a radically different environment

A handful of Chinese companies are slowly making their way to US IPOs, injecting life into the market for these listings, which dulled since June last year when Beijing brought the hammer down on ride-hailing company Didi Global days after its float in New York. But all the signs show that any IPO revival will be toned down — and considerably less lucrative for bankers and investors.

Chinese medical device maker Meihua International Medical Technologies was set to debut in New York this week, after months of no action for US-bound Chinese deals.

It is certainly cause for celebration. After all, Meihua’s deal — if it succeeds — will bring back into play an alternative IPO market for Mainland companies that are hungry for capital and have long rushed to the US for better liquidity and valuation, and to find more sophisticated investors.

But any firm looking to raise a few hundred million dollars or more would have to navigate a hostile route to listing across the Pacific, bookended by wary regulators.

Meihua has a small advantage. It, along with a handful of compatriots, are bringing IPOs that are small enough to fly under the radar of authorities. They will likely be unencumbered by China’s various new rules governing overseas listings, enacted after Didi rushed through its $4.4bn IPO in June 2021, much to the ire of regulators in Beijing. Among the new rules is a requisite national security review for any issuer handling personal data of 1m users or more.

For example, Meihua is aiming to raise up to $55m from its IPO. Yet, it is the largest among its fellow Chinese listing-hopefuls.

Software company U-BX Technology is eyeing $33m, while Hengguang Holdings, an online insurance broker, and electronic components manufacturer Ostin Technology Group, are targeting $18.4m and $15.5m, respectively.

The trio filed IPO paperwork with the Securities and Exchange Commission in January.

The takeaway from such a pipeline is that Chinese firms are waiting for more clarity on how a US listing would be received — by both regulators and the market.

Meihua warns in the beginning of its IPO prospectus that investing in its shares “involves a high degree of risk” and that “the Chinese government may exercise significant oversight and discretion over the conduct of our business and may intervene in or influence our operations at any time”. Certainly not comforting words for international investors.

Given the size of Meihua’s IPO, it is not an ideal test case for demand for US deals from Mainland firms, but it is at least generating headlines and drawing fresh attention to what was once a thriving market that regularly hosted multi-billion-dollar deals.

The last US listing of a Chinese company was by LianBio in October 2021, according to Dealogic data. At $334.5m, it was the largest such IPO since the market dried up in July last year, the data shows.

Market conditions now are far from ideal, though. Globally, bouts of volatility have sent benchmark indices whipsawing year-to-date. For instance, the S&P 500 Index is down 6.79% so far this year, and the Nasdaq Composite has fallen 10.69%.

In China, companies that are still persevering in the equity capital markets are playing it safe and sticking to the Mainland or Hong Kong stock exchanges. But even IPOs that are making it through Hong Kong are, for the most part, getting mediocre amounts of demand and relying on cornerstone investors to get past the finish line.

But when markets stabilise and sentiment picks up, the divide between Greater China and the US will likely only become bigger. In the near term, there is little indication that the route from China to the US will be busy again.

New York offered a deep pool of sophisticated investors for China’s vast number of new economy start-ups, leading to higher IPO fees for investment banks working on the deals.

But the landscape has now shifted irrevocably. Issuers, investment bankers and investors need to adjust to the new normal.

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