Despite trade war, US investors embrace unprofitable Chinese IPOs in plan for long-term gain

Strength in IPOs contrasts sharply with drop in other types of cross-border investments

PUBLISHED : Thursday, 04 October, 2018, 4:12am
UPDATED : Thursday, 04 October, 2018, 12:51pm

In a rare bright spot for cross-border investments, American funds are welcoming public offerings from money-losing Chinese companies with open arms, in spite of escalating trade tensions that have otherwise dampened activity this year.

Two out of every three Chinese IPOs in the US so far this year have been issued by unprofitable companies, according to data compiled by Jay Ritter, a finance professor at University of Florida. Historically, about 39 per cent of listing companies from China were losing money at the time of their IPO, according to Ritter’s data, which goes back to 1993.

The healthy appetite shows that investors are looking past the continuing geopolitical tensions between the world’s two largest economies and instead focusing on the long-term prospects expected from China.

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“Investors are still very eager to get exposure to China’s growth,” Ritter said. “Even with stories about China slowing down, it still is one of the fastest growing economies in the world.”

That strength among investors comes as a stark contrast to a precipitous drop in Chinese investments in the US, which plummeted 92 per cent in the first nine months this year from its peak two years ago, according to Mergermarket data. Meanwhile, US investments in China flattened last year.

The strong appetite for Chinese start-ups has also defied predictions from a few months ago that deals would slow after some offerings flopped. Shares in the used-car website Uxin and the electric-vehicle manufacturer Nio have suffered double-digit percentage losses after their stock debuts.

We continue to see a strong pipeline of IPOs coming from around the world, and particularly from China
Alex Ibrahim of the NYSE

Even so, just within the last few days, the online English-learning services provider Laix and mobile internet company CooTek, both based in Shanghai, went public on the New York Stock Exchange, raising a combined US$124 million.

Tencent Music, the tech giant’s music division, also filed to go public in the US this week, with an initial goal to raise US$1 billion.

Overall, the number of IPOs from China hit a four-year high in the third quarter, with 10 companies raising a total of US$3.3 billion, according to Renaissance Capital, a provider of institutional IPO research. As many as 23 Chinese companies have gone public in the US for the first three quarters of the year, more than any full-year total since 2010.

The two leading stock exchanges in the US – the New York Stock Exchange and Nasdaq – both expected robust listings from China going forward.

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“We continue to see a strong pipeline of IPOs coming from around the world, and particularly from China,” said Alex Ibrahim, head of international capital markets for the NYSE.

The strength of the US markets, which continue to set new highs, have also helped to fuel investor confidence. The S&P 500 index has seen a steady run-up since March and has remained above 2,900 for a month despite the intensifying trade frictions.

Wall Street also continues to regard China as a compelling growth story. In a Tuesday report, Richard Turnill, the global chief investment strategist at BlackRock, the world’s largest asset manager with more than US$6.3 trillion in assets under management, wrote that “escalating trade frictions are the key risk” but “much of the downside may already be priced in”.

Turnill wrote that he expected to see “steady Chinese economic activity ahead that may once again defy sceptics”.

“China is juggling competing objectives: reining in unregulated lending while trying to support the economy through bank credit, infrastructure project approvals and fiscal spending. This may provide support – with a lag – if China hits any air pockets along the way,” he wrote.

Tariffs are bound to negatively affect businesses that have grown increasingly global by raising costs. But companies focused on domestic Chinese markets are less affected.

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Louis Hsieh, the chief financial officer of Nio, the electric-vehicle maker that raised US$1 billion with its IPO last month, said he regarded the trade-war environment as a positive. “Right now, tariffs actually help us because we focus on the domestic Chinese market,” he explained. “Tariffs make Western cars more expensive in comparison.”

Ritter, the University of Florida professor, agreed: “Trade wars and threats of them should definitely concern investors to some degree. But certain industries are less subject to those issues, and investors are fearful of missing out.”