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The US and Chinese flags outside the New York Stock Exchange in 2011. Take-private deals of US-listed Chinese firms like Qihoo 360 could increase as a result of recent accounting lapses at Luckin Coffee, some bankers say. Photo: Reuters

Chinese companies eye IPOs closer to home as Luckin Coffee, TAL scandals taint path to US markets

  • IPO hopefuls debate switching plans to Asia after Luckin Coffee scandal dims confidence in Chinese companies
  • Governance issue could also hasten departure of existing US-listed Chinese companies via take-private deals, bankers say
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Chinese companies are likely to turn to Hong Kong or Shanghai for capital, after two accounting scandals in a week burned investors and triggered a crisis of confidence in their US-listed peers.

At least two companies are now debating with their sponsors about switching their initial public offering (IPO) plans to Hong Kong from the US, according to a senior investment banker, who declined to be identified because the discussions are private.

While investors have become “accustomed” to decades of tainted accounting books including the Sino-Forest saga in early 2011, the latest lapses could not have come at a worse time when US-China relations are frayed by spats over trade and the origin of the new coronavirus.

Luckin Coffee slumped by a record number on April 2 after it said former top executives inflated its sales figures, while TAL Education also said it discovered the same misdeed. Meanwhile, video streaming firm iQiyi has rejected reports by short sellers that the company made up its revenue.

The switch could further dent the outlook for IPO bankers after US equity offerings fell 13 per cent last quarter to US$29.8 billion, the slowest start to a year since 2009, according to Bloomberg data. They fell for a second year in 2019. This may be boon to Hong Kong after being overshadowed by Shanghai as the top IPO venue this year.

Two more US-listed Chinese companies come under scrutiny after Luckin Coffee’s fraud

“Due to the US-China trade tension and the related rumours about potential geopolitical implications on US-listed Chinese companies, there was already a decline in Chinese issuers seeking US listing last year,” said Edward Au, co-leader of the national public offering group at Deloitte. “We expect there will be even fewer this year.”

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Recent events surrounding cases like Luckin Coffee, TAL Education and iQiyi may also force Chinese IPO candidates to consider raising funds from private investors pending a better window, said Wang Yang, a Hong Kong-based partner at law firm Dechert.

People wearing protective masks are seen outside a Luckin Coffee outlet in Shanghai, China. The accounting scandal is hurting investor confidence in the reliability of Chinese companies’ financial reports. Photo: Bloomberg

“The unfavourable sentiments surrounding Chinese firms may delay the IPO process, leading companies to potentially look for pre-IPO investors during this period of time,” Wang said.

Besides corporate governance concerns, the poor performance of Chinese companies on US exchanges had also given investment banks some cold feet about their IPO prospects, some bankers said. Some banks have had to pull out from syndicates at the pre-marketing stage as weak appetite from investors made fees unattractive.

Shanghai overtakes Hong Kong as world’s top IPO destination

Most of the six Chinese companies that debuted in the US last quarter saw their prices fall below their IPO prices, data from Deloitte shows. They included financial services, medical and biotech firms. Granted, most stocks also fell significantly last quarter amid the coronavirus pandemic.

Bankers now predict biotech and deep technology firms that have traditionally preferred to list in the US will now look at Hong Kong and Shanghai more favourably.

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Beside new IPO hopefuls, the latest scandals could also push existing Chinese entities to delist as a slump in stock prices weakened their ability to raise fresh capital at higher valuation.

IPO advisers also said they are expecting more private equity investors to take US-listed Chinese companies private, and subsequently re-list them on the Hong Kong or Shanghai Stock Exchange.

Asian tycoons team up with private equity to take companies private

They expect the founding shareholders to work with private equity investors to take advantage of the depressed share prices to buy out minority investors.

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In one example, Chinese internet security firm Qihoo 360 re-listed its shares in Shanghai at US$62 billion capitalisation, or seven times more than its market value when it was delisted in the US in 2016.

“Already a number of Chinese ‘take-private’ deals are pending post coronavirus, and I suspect there will be a further increase in numbers,” said Stuart Witchell, a managing director at risk consultancy firm Berkeley Research Group, stressing the need for investors to undertake in-depth due diligence on these companies.

Alison Tudor-Ackroyd contributed to this article.

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