Chinese Tech Firms Aim to Stay Home
Jun 04, 2015
The booming stock market in China and more-favorable domestic regulations are driving a wave of tech companies based there to list shares at home instead of going public in the U.S.
Bankers, lawyers and early-stage investors in China said interest by companies to list shares in China has increased significantly in recent months. Companies said listing in the country will make it easier to explain their businesses to investors, who often are their customers. They also point to the stunning success of companies such as Beijing Baofeng Technology Co., whose shares have skyrocketed more than 3,600% since listing in China in March.
The lure of China’s markets is drawing companies that already have listed in the U.S. Some have gone private so they can relist in China, and dozens are planning to follow. Regulatory rules ban significant foreign ownership of Internet content-related companies listed in China.
Driving the move is a focus by Beijing on the Internet and innovation-driven sectors to boost slowing growth by easing listing rules. Another factor is a stock rally that has seen the Shanghai Composite Index climb 43% this year, although it fell 6.5% on Thursday.
Meanwhile, Chinese investors are pouring money into funds that target startups. In 2014, 39 angel investment funds were set up in China, raising $1.07 billion, a 143% increase from the previous high in 2012, according to investment database pedata.cn, which is run by Zero2IPO Research in Beijing. Angel investors typically provide personal funds to finance small startups.
High valuations and the loosening of listing rules will draw more Chinese companies to their home market, said Jianbin Gao of PricewaterhouseCoopers in China. “We anticipate significant growth in technology listings on domestic exchanges,” he said.
Until recently, Chinese markets were hard to access for tech firms because, unlike in most countries, China requires government approval before a company can list its shares. Beijing also demands that companies be profitable before listing. Both of those requirements are expected to change this year as part of Beijing’s efforts to overhaul its financial system.
Still, some analysts said some big Chinese tech companies will continue to list in the U.S. to obtain better access to funding and expertise to run their businesses. But there are no obvious candidates in the next few years to follow in the footsteps of the most successful Chinese initial public offerings in the U.S., Alibaba Group Holding Ltd.and Baidu Inc.
“To be frank, they’re not going to be better businesses than the Baidus and Alibabas of the world,” said Hans Tung, managing partner at GGV Capital, a venture-capital firm that invests in the U.S. and China. He said most Chinese IPOs in the U.S. haven’t performed well.
The next likely candidate for a blockbuster U.S. IPO is mobile-phone and software maker Xiaomi Corp., but the company has said it has no plans for an initial public offering in the next five years.
Chinese tech companies, including Alibaba and Baidu, have long been funded by U.S. venture-capital firms that reaped big returns when the most successful companies had IPOs in the U.S. Any shift to list in China could hamper some U.S. venture firms and, conversely, give a boost to Chinese investors. U.S. and other foreign venture-capital firms that don’t have investment funds denominated in the Chinese currency, the yuan, could lose out to Chinese competitors on some of the hottest deals.
“It’s the Chinese capital competing with the U.S. and European capital,” said Bao Fan, chairman of investment bank China Renaissance. Mr. Bao said his firm is working on about a dozen deals. Some involve the privatization of U.S.-listed companies, while others are for Chinese startups that are funded by foreign investors but want to list in China, he said.
In cases like this, big institutional investors in the U.S.—such as university endowments, foundations and pension funds—that invest in venture startup funds could lose out on opportunities for big returns if they are bought out before a Chinese company goes public.
The move to list in China also could hurt U.S. stock exchanges that have benefited from Chinese initial public offerings such as Alibaba’s record-breaking $25 billion deal in 2014 but overall have struggled to attract new companies in recent years.
To be sure, disclosure is weaker in China than in other countries. For investors, the market remains riskier and more volatile than more-developed markets. Also, the run-up in Chinese shares could end, causing investors to pull out of stocks to take profits, pressuring shares and damping enthusiasm for IPOs.
The Shenzhen Stock Exchange’s ChiNext index, a board for startup companies, has surged 134% this year, driven, in part, by investors’ enthusiasm for tech stocks. The rally in the Shanghai Composite has been propelled, in part, by a stock-trading link between the Hong Kong and Shanghai exchanges, which gives foreign investors better access to shares in China’s biggest stock market. In contrast, the S&P 500 index has gained 3% this year.
At least two dozen U.S.-listed Chinese companies, including dating site Jiayuan.com International Ltd.and gaming developer Shanda Games Ltd., are taking themselves private and planning to list in China, according to regulatory filings. Shanda declined to comment, while Jiayuan.com didn’t respond to a request for comment.
Many Chinese startups aim to follow the path of Beijing Baofeng, a video site, which listed its shares on ChiNext. Baofeng Chief Executive Feng Xin said he considered listing on the Nasdaq Stock Market, but knew it would be tough because China’s two top video companies already had listed in the U.S. and subsequently merged to form Youku Tudou Inc.in 2012.
The decision to list in Shenzhen proved to be a good one. Baofeng’s shares rose 10%, the daily trading limit, every day for the first 34 days after the IPO. As of Wednesday, the company was valued at $5 billion, compared with Youku Tudou’s $5.3 billion. The Shenzhen Composite Index has surged 95% in 2015. A trading link between Hong Kong and Shenzhen is expected to open this year.
By contrast, Baozun Inc., which does digital marketing for international brands in China, had a disappointing IPO in New York on May 21. The company priced its offering at $10 a share, below the expected range of $12 to $14. On Thursday, Baozun’s American depositary receipts fell 2.9%, to $11.88.
The offering was only the second in the U.S. by a Chinese company this year after 2014’s boom. Some analysts said the pricing could reflect broader worries about the Chinese economy as well as skepticism about the country’s Internet stocks.
Chukong Technologies Inc., a mobile-gaming company, filed for an initial public offering in the U.S. in January 2014, hoping to raise $1.2 billion to $1.5 billion. It dropped the plan four months later because investors were willing to pay only half the price for the shares. Now, the Beijing-based firm is seeking to list in China, said Chen Haozhi, chairman and chief executive.
Listing in China has other advantages. “In a U.S. public offering, the word ‘public’ is meaningless because the U.S. public doesn’t know Chinese companies,” said Baofeng’s Mr. Feng. He said the company’s stock-market success is due, in part, to its customers. “When your users become your investors, they become extremely loyal,” he said.
Source: THE WALL STREET JOURNAL