Why Chinese companies are flocking to the US for a listing

By end of August, 168 Chinese companies were trading in the US, 52 of which are internet and technology firms, taking up the largest chunk

PUBLISHED : Thursday, 19 October, 2017, 12:00am
UPDATED : Thursday, 19 October, 2017, 11:45pm

With Chinese micro-lending fintech company Qudian still basking in the excitement of seeing its shares soar as much as 48 per cent on its debut – to touch an intraday high of US$35.45 on the New York Stock Exchange on Wednesday – it is certainly not the only Chinese firm to have experienced such a rush.

RYB, the first Chinese early childhood education provider to list on the NYSE, also saw its shares rise more than 40 per cent on its debut in September.

And the list goes on.

In April, shares in Chinese peer-to-peer lender China Rapid Finance rose more than 10 per cent on its NYSE debut, while Bright Scholar, a Chinese education provider, surged 27.7 per cent, also on NYSE, on its first day of trading in May.

And there are other aspiring Chinese industry leaders waiting to join the party.

Two of Qudian’s rivals, peer-to-peer online consumer credit providers Pai Pai Dai and He Xin Dai also filed for listings in the US recently.

By the end of August, there were 168 Chinese companies trading in the US, 52 of which are internet and technology companies, taking up the largest chunk.

Better international exposure and the need to raise cash are the main reasons behind the Chinese offering frenzy on Wall Street, say analysts.

Ant Financial backed online lender Qudian surges in NYSE debut on China’s booming consumer credit market

“Chinese companies favour offshore listings to enable hard currency fundraising and gain access to a broader international investor base and among offshore listings, the US is the most highly desired,” said Brock Silvers, managing director at Kaiyuan Capital.

Jasper Lo, senior vice-president at iBest Finance, also adds one of the major motives behind the US offering demand is the opportunity to better brand their companies.

“The US is a much more international market than Hong Kong,” he said, “and companies can certainly ‘go beyond Asia’ by listing there.”

A further, more practical motive is that those at the top of these new listed companies can gain easier access to immigration for themselves and their family, if their companies gain exposure in the country.

“Chinese execs prefer a US presence to benefit immigration, child education, and capital security issues,” said Brock.

The US also offers faster IPO approval than Hong Kong and the mainland, especially for young companies with an urgent need to raise finds, so they can expand quickly.

In the mainland, any company seeking an IPO has to show profit for three consecutive years leading up to the application year, while rules about profitability are less stringent in the US.

Around 600 are now believed to be queuing up for mainland IPO approval, according to latest figures quoted by Lie Yun Wang, a technology news website based in Beijing.

“Hong Kong also has a more stringent regulatory environment than the US, and that’s another strong reason why Chinese firms are flocking to the US.” said Lo.

Lo underlines that the Hong Kong Stock Exchange must act quickly to assess what advantages it can offer to lure more Chinese companies away from a US listing, because if it doesn’t, “that trend of more Chinese firms opting to list in the US will only continue”.

“The Americans have been trying so aggressively in recent years to grab Chinese firms to list there.”

But Qudian has one other major worry, on top of two new names on the block – potential competition with its principal shareholder, Alibaba Group’s affiliate Ant Financial, which could further weigh on the company’s earning prospects.

The small consumer credit sector operates in a regulatory grey zone
Brock Silvers, Kaiyuan Capital

It now engages most its active borrowers through different channels on Alipay, China’s largest mobile payment platform run by Ant.

The company says the partnership with Alipay has contributed to the significant growth of Qudian’s total revenues and improvement of its profitability.

“If such channels (on Alipay) were to change or become ineffective, costly or unavailable, our business, future prospects and results of operations may be materially and adversely affected.” the company said in a latest SEC filing.

Silvers described Qudian’s relationship with Ant as a “worrisome” one.

“Through its control over the company’s consumer interface, Ant exerts substantial control over Qudian’s operations and profitability,” he said.

“Ant could one day effectively void its US shareholders’ variable interest entity accounting structure [which means investors own the entity, but their voting rights are limited] by simply restricting [or overcharging for] access to this interface, while simultaneously creating a competing entity.”

Morgan Stanley, Credit Suisse, Citigroup, CICC and UBS are joint book runners for the IPO.

Alibaba owns the South China Morning Post.