A delay in Tencent Music Entertainment’s New York initial public offering could signal a pause in Chinese companies’ rush for U.S. listings.
Twenty-three such firms went public in the U.S. during the first three quarters of this year, on pace for the busiest year since 2010, according to Connecticut-based IPO advisor Renaissance Capital.
The offerings included massive deals such as video streaming company iQiyi’s $2.3 billion raise in March and e-commerce company Pinduoduo’s $1.6 billion offering in July.
Tencent Music, the music streaming arm of Chinese technology conglomerate Tencent, plans to raise $1 billion, according to an Oct. 2 filing. But amid a sharp decline in U.S. stocks, led a global market sell-off in the last two weeks, the company decided to postpone its listing to November, according to The Wall Street Journal which cited sources. A representative for Tencent Music declined to comment to CNBC.
The pace of Chinese listings in the U.S. picked up as the second half of the year approached. Ten of the IPOs took place in the third quarter alone, with companies pushing to complete public offerings despite increased trade tensions between the U.S. and China, according to Renaissance.
While Beijing has tried to encourage domestic companies to list at home, the number of overseas IPOs indicate there is a desire to build capital outside China. The U.S. stock market has hit all-time highs in the last few months, while mainland Chinese stocks are in a bear market, or more than 20 percent below their recent high.
“If you’re growing up in an environment where there’s some volatility, then you’re probably going to get more liquidity, exit while you can,” said Jim Fields, co-founder of Relay, a Shenzhen-based company that has made informational videos for several Chinese companies that listed overseas this year. He said Relay has had short notice — roughly four to six weeks, or even less — to produce a video for a Chinese company to share with investors.
“There’s something about the culture here that gets people very excited about trends,” Fields said. “These IPO projects are very quick turnaround. Companies don’t want to inform their competitors they’re doing an IPO.”
Improving brand recognition
It’s not immediately clear why the number of overseas Chinese IPOs has climbed this year. Analysts have noted 2018 is an exit year for many investment funds in Chinese companies. In interviews with CNBC, executives for several of those IPOs talked about how a New York listing would help improve brand recognition.
“We chose to [hold an] IPO at this time because we really wanted to raise awareness of our compan[y],” Susan Li, president of Shanghai-based mobile keyboard and app company CooTek, said in a phone interview when the company listed in New York on Sept. 28. Li said the public offering would help the company attract talent and business partners to support its rapid growth.
But the rush to list may also arise from worries market conditions will not remain favorable for long.
All seven Chinese IPOs in September downsized their offerings when they set terms, Renaissance said.
Chinese electric scooter company Niu disclosed in an Oct. 9 filing that it plans to raise about $95 million, down from the $150 millionstated in its initial filing in late September.
Niu and many of the Chinese companies that have already gone public in the U.S. are also not yet profitable.
Jay Ritter, a finance professor at the University of Florida, found that roughly 70 percent of Chinese IPOs in the U.S. this year have lost money in the 12 months prior to their listings. “So the trend is similar to U.S. companies — a higher fraction of IPOs have been reporting losses in recent years, compared to the past,” Ritter said in an email.
Ritter also pointed out that unprofitable companies are not allowed to go public in mainland China, and that in the last few years, the China Securities Regulatory Commission has not approved IPOs with a price-earnings ratio above 23, allowing Chinese companies to raise more money overseas than at home.
The primary characteristic of Chinese entrepreneurs that hasn’t changed over the years is “short-term thinking,” said Douglas Menelly, a communications consultant who has worked with Chinese companies on U.S. listings and author of the book “Lessons in Communication: A Study of the Integration of Western Business Philosophy and Chinese Culture.”
Many of these Chinese business founders would prefer to accept a quick payout to avoid risk, and often make the IPO their end goal, Menelly said. But compared with high-profile cases of fraud several years ago, he noted, investment standards have increased and Chinese companies have become more professional.
However, increased scrutiny may be needed for U.S. investors who are often far removed, geographically and culturally, from many Chinese companies claiming to have high-growth potential.
Some Chinese listings this year have seen high volatility — shares of electric car maker Nio soared 75 percent in its second day of trading before dropping near its IPO price. Within a month of Pinduoduo’s listing, the e-commerce company was hit with a Chinese probe and U.S. lawsuits over sales of counterfeit goods. Other companies openly acknowledge the risks of Chinese regulation to their operations.
Qutoutiao, a mobile content aggregation company that went public in September, said in its prospectus that “our lack of an Internet news license may expose us to administrative sanctions, including an order to cease our Internet information services that provide news or to cease the Internet access services provided by third parties to us.”
“We are in the process of preparing an application for an Internet news license,” the company said.