Is China Tech IPO Wave Running on Empty?

As China high-tech IPOs go, the current wave of listings taking place in New York and Hong Kong is probably one of the largest of all time, raising billions of dollars for an emerging group of new-economy companies offering everything from online loans and insurance to internet-based takeout delivery services. But all good things must end, as the saying goes, and it does seem like just a matter of time before the curtain comes down on the current boom.

A growing number of signs from the last few weeks are hinting that things may indeed be nearing an end, which could be bad news from anyone who fails to make it to market in the next five or six weeks. That’s because such windows are relatively rare, the last coming around four years ago that ended with a bang when e-commerce giant Alibaba Group Holding Ltd. raised a record-breaking $25 billion.

We haven’t seen anything near the size of Alibaba in the current round, which started a year ago around the time of a blockbuster $1.5 billion listing for ZhongAn Online Property & Casualty Insurance Co. Ltd., the online-only insurer backed by Alibaba, as well as Tencent Holdings Ltd. and Ping An Insurance. Since then, dozens of major high-tech listings have come and gone in New York, which was the traditional home of such offerings, as well as a new group like ZhongAn that set up shop in Hong Kong.

One sign that things have gone into overdrive has been a wave of money-losers that have joined the train lately. After all, it’s far more difficult to convince investors to fork over millions and even billions of dollars when you’re still losing big money.

The money-loser train picked up in earnest over the summer, when Hong Kong played host to its first two loss-making drugmakers, Ascletis Pharma Inc. and BeiGene Ltd., under a new plan that allowed such firms to list on its main board for the first time. The trend kicked into high gear in July when money-losing discount e-commerce site Pinduoduo Inc. raised a lofty $1.6 billion, though the company’s shares later tanked after word got out that many of the products on its site were counterfeits.

Wave Cresting?

But the granddaddy of the money-losers came just last week, when online-to-offline services provider Meituan-Dianping raised $4.4 billion in Hong Kong in this year’s largest internet offering. That IPO looked a bit dubious to me, since the company is currently at the heart of two heavily money-losing industries, namely takeout dining services and shared bicycles. But that didn’t seem to faze investors, who not only forked out the $4.4 billion, making it the third-largest IPO in the current wave, but also awarded the company a lofty $53 billion valuation.

For anyone who tracks these things, that means the company is now China’s fourth-largest internet firm, behind only the “BAT” of Baidu Inc., Alibaba and Tencent. Of course, if I were writing this column a month earlier, it’s quite possible that e-commerce giant JD.com Inc. might still be No. 4 on the list. But that’s another story, which has seen the company’s stock lose more than a fifth of its value over the last few weeks since founder and CEO Richard Liu was accused of rape in the U.S.

But let’s return to the current wave and our discussion of whether it has gone its course and is about to run out of steam. On the surface at least, one could point to parallels between last week’s Meituan IPO and the Alibaba listing that clearly marked the end of the earlier wave. Both events were record-setters in their respective waves, even if Alibaba’s listing was far larger than Meituan’s.

Waning enthusiasm for some of the other latest listings also seems to indicate investor interest is drying up. The most notable case was just a couple of weeks ago for electric car maker Nio Inc., which ended up pricing just a penny above the low end of its price range and raised less than half of its original target. Another listing encountering similar headwinds came last week from X Financial, the first offering by a financial technology (fintech) company since an earlier wave abruptly ground to a halt at the start of this year amid a regulatory crackdown.

In both the Nio and X Financial cases, my sources tell me a large portion of the IPO shares — nearly 90% for Nio — were purchased by a small number of major buyers. That indicates that demand for some of these newest offerings is hardly broad-based, and in fact may be coming from a few “friends” of the companies making listings. One of my other sources tells me such “cornerstone” investors are indeed forming a major part of the book for at least one or two other upcoming IPOs.

Then there’s the absent elephant in the room, in the form of a highly anticipated major listing from the music arm of Tencent that has suddenly gone silent. The earliest reports this spring hinted that Tencent Music was aiming to raise up to around $4 billion in its IPO, which would have put it in close competition with Meituan-Dianping. The company was reportedly on the verge of filing its IPO prospectus in the U.S. at least twice earlier this month and last, only to have nothing appear.

That silence seems to be the loudest indicator yet that perhaps all is not humming along happily in this multibillion-dollar fundraising frenzy. Frankly speaking, I’m a bit surprised the party has gone on this long, and the fact that so many money-losing firms are coming to market does seem to have a certain “bottom of the barrel” feel. At the end of the day, only time will tell when the well finally dries up for China tech firms in this latest fundraising binge. But the signs certainly seem to point to an end within the next five or six weeks.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com.