Caixin
Jun 19, 2019 10:00 AM
TECH TALK

Growing Parade of China Tech ‘Losers’ Line Up for New York Listings

Nobody likes a loser, at least not of the cash-bleeding variety.

That’s the theme for this week’s column, in which we focus on a group that’s making up a growing part of new Chinese high-tech initial public offerings (IPOs) in New York and Hong Kong. This particular tale is a subset of a much larger story that has seen a window for offshore Chinese tech listing now near its two-year anniversary — far longer than any previous period that I can recall.

That window has seen top names from a second-generation of China’s biggest tech firms go to market, including e-commerce up-and-comer Pinduoduo Inc.; online-to-offline services leader Meituan Dianping; and Xiaomi Corp., the smartphone-maker with big global aspirations. But as time marches on and most of the big names get listed, the parade is also seeing a growing number of what I’ll politely call “grade-B” companies coming into the mix, including the money-losers I’ve mentioned.

Not too surprisingly, many of these second-class IPOs have been duds since making their trading debuts over the past year. A few notable exceptions do also exist, and later on I’ll try to explore how investors can separate the high-tech diamonds-in-the-rough from the rest of the clutter.

A number of factors are fueling the listing parade of money-losers, led by the obvious fact that once the premium names have made their bows it’s only natural that the understudies would be waiting for their turn. But there are also some other factors at work, including worries about China’s slowing economy and also anxiety over when the curtain may finally come down on this unusually long IPO window.

That leads nicely into the brief history lesson I’ll provide here to bring some context to conditions that have created the current mini-parade of Chinese high-tech losers.

China tech watchers will recall the last IPO window lasted less than a year, from late 2013 to the fall of 2014, and saw such big names as the Twitter-like Weibo Corp. and No. 2 e-commerce player JD.com Inc. go public in New York. The curtain came down with the blockbuster IPO by e-commerce juggernaut Alibaba Group Holding Ltd., whose $25 billion in funds raised remains a global record to this day.

After Alibaba, things largely went dark for offshore Chinese tech IPOs until September 2017, when ZhongAn Online P&C Insurance Co. Ltd., the online-only insurer backed by Alibaba and internet rival Tencent Holdings Ltd., made its trading debut in Hong Kong. The absence of a major IPO window for three years meant the pipeline for new listings was quite full, including very respectable sector leaders like Meituan Dianping.

Many of those made IPOs in the year that followed, raising billions of dollars in the process. Their post-IPO performance has been generally positive, though a few notable duds like Xiaomi have struggled to find an audience.

Tale of two fashion sellers

A nice case study for what’s happened more recently comes from Mogu, a Chinese company that made its New York IPO in December, and Revolve Group LLC, a U.S. peer that made its debut less than two weeks ago. Both companies use a similar business model that combines e-commerce for fashion products with social media elements.

In most regards, Mogu stacks up quite nicely against Revolve. Mogu has far more active customers, 32.8 million to be precise, compared with Revolve’s more modest 1.2 million. Revolve does seem to have an edge over Mogu in terms of quality over quantity, since its average order size is $279, compared with a much skimpier $10-$30 for Mogu.

As many readers can probably guess, the one place where these two companies really differ is the bottom line. Revolve posted a profit of about $31 million last year, compared with Mogu’s loss attributable to shareholders of more than 1 billion yuan ($144 million) for its most recent fiscal year.

That reality is reflected in the two companies’ post-IPO performances, which are polar opposites. As of Monday’s close, Revolve’s shares had more than doubled from their IPO price of $18, while Mogu’s were down 75%. Mogu is hardly alone in its misery, as quite a few other money-losers are also down sharply from their IPO prices.

Those include LAIX Inc., whose shares have lost about 20% of their value since its IPO last September. LAIX actually represents a broader group of online education companies that form a sizable subset of money-losing IPO firms in the current wave. While one or two of the better ones are ahead of their IPO price, many others are well below. Other major losers include electric car startup Nio Inc., whose shares are down 61%; and Qutoutiao Inc., a news aggregator often called No. 2 to superstar Bytedance Ltd., whose shares are down by more than a third.

As I’ve already mentioned, there are a few notable exceptions to the chilly reception for the loss-makers. One is Pinduoduo, a discount e-commerce company seen as one of the first real threats to the duopoly of Alibaba and JD.com in years. Another is Bilibili Inc., which operates a relatively unusual online video service with interactive features that has given it something of a cult following. The former is 8% ahead of its IPO price and at one point was much higher, while the latter is 25% ahead.

One of my sources who works closely with many of these companies noted that a number of the duds came from a group whose main IPO investors were what he called “friends and family” of the company founder. Many of those companies were determined to make an IPO at any cost, and didn’t really care if there was true demand for their shares, he added. Thus it’s not too surprising that shares of those have tanked post-IPO, since demand never really existed in the first place. He noted that China’s sputtering economy may be at least partially driving such listings, since major shareholders of such companies may simply be looking for ways to move their money offshore.

At the same time, investors seem to be making exceptions for companies like Pinduoduo and Bilibili that have intriguing stories to tell. Alibaba has already showed how valuable a leading e-commerce company can be in China, and some investors are undoubtedly hope Pinduoduo may be able to find similar success. Likewise, people seem intrigued by Bilibili’s strong following despite being profit-challenged.

At the end of the day, we can probably expect the volume of money losers and “friends-and-family” IPOs to grow in the months ahead until the current window finally peters out, probably by the end of the year. While there may still be a diamond-in-the-rough somewhere in this parade, I would expect the vast majority will be mostly dogs hoping to capitalize on some Western investors who may still be smitten with the China high-tech story.

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

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