Alibaba-Backed Company Could Turn The Tide For Chinese IPOs in US After String of Busts

IPOs in 2017

The pipeline of Chinese (FXI) IPOs planning to list on the New York Stock Exchange (SPY)(NYSE) (NDAQ)could make 2017 the biggest year for the country’s stocks since 2014 when Alibaba (BABA) listed its shares. After a dull 2016, analysts expected 2017 to be an overall weak year for IPOs. Last year, cyclical trends and global events kept companies away from public markets, but 2017 has seen considerable price action and an active IPO market. With confidence in stock markets booming back after the US election late in 2016, companies are lining up with IPOs.

2016 saw new listings worth $119.4 billion on the New York Stock Exchange with Chinese logistics company ZTO Express (ZTO) being the largest with an IPO worth $1.4 billion. So far in 2017, 137 IPOs worth $27.2 billion have been announced in the United states, 6.6% higher year over year.

Mark Hantho, Global Head of Equity Capital Markets at Deutsche Bank expects 2017 to be a good year for fresh equity raising. “On balance, we have a fairly healthy market that people have been participating in. The class of 2017 is doing fine and there is encouragement by those giving advice to clients that this market is wide open,” he mentioned.

Not all Chinese IPOs can recreate Alibaba’s story

IPOs by Chinese firms have not had much success in gaining popularity among investors in the US since Alibaba(BABA) three years ago. The weak performances for both China Rapid Finance (XRF) and ZTO Express (ZTO) on the New York Stock Exchange is a sharp contrast to 2014 when a number of premium players including Alibaba(BABA), Weibo (WB) and JD.com (JD) gained hefty valuations with their shares rallying admirably within the first 6 months of listing.

Since then, China’s economic growth has slowed down but US investors continue to closely follow large Chinese names. Shares of Alibaba(BABA) are up 42% while shares of JD.com have surged 94.9% since their IPOs in2014. Shares of Baidu are currently trading 19 times of its IPO price.

While stocks like Alibaba, Baidu (BIDU), and JD.com continue to attract to investor attention long after their blockbuster IPOs, the same is not true for all Chinese companies. Smaller Chinese companies with market values less than $1 billion listing in the US have not received positive responses, with some having de-listed from New York and now eyeing a China listing instead.Chinese companies like 500.com (WBAI), Tuniu Corp (TOUR) and Kingold Jewelry (KGJI) listed their shares on US Stock Exchanges in 2014, but currently trade nearly 60-80% below their issue price. Such stock behaviour creates negative sentiment around Chinese companies listed in the US.Similarly, Sky Solar Holdings (SKYS) listed on the NASDAQ in 2014 but is down 85% since its listing. Meanwhile, Leju Holdings (LEJU) that listed in 2014 at $12, is now trading at $1.79.ZTO Express,(ZTO) the largest IPO in 2016 is now trading 26% below its issue price of $19.50. ZTO Express provides shipping and delivery services to Alibaba. The company raised $1.4 billion last year, but opened $1.10 lower than its issue price of $19.50. For an IPO of this scale the performance was somewhat of a surprise for investors.

James Guo, the CFO of ZTO mentioned that the stock performance post-IPO was not in line with what was expected during the roadshow. “Pricing IPOs is always very difficult,” he said. “We met with hundreds of investors all over the world over the past two weeks and investors were very excited about our story. We saw strong momentum during the book-building process, and the deal itself ended up being over 15 times subscribed.”

“We priced the offering at a level that we thought would be fair for all parties involved. Of course it’s usual to see some volatility in the stock price of deal that is as big as ours, but as far as the share price goes, it’s not our place to comment. We’ll let investors in the market decide that. At the end of the day, we think that if we continue to focus on executing our strategy and creating value for our shareholders, the share price will take care of itself over the long term,” he continued.

China Rapid Finance raised $60 million in an IPO on the New York Stock Exchange in May 2017. Since it’s listing, shares of China Rapid Finance are down 7.81%. Shares of the company received tepid response from investors hinting that US investor appetite for Chinese companies may indeed be fading away.

So what is driving the sentiment for Chinese companies in the US?

• Expectations mismatch – Investors expect big returns like Alibaba from all Chinese IPOs and tend to invest without proper due-diligence. When these companies cannot match up to their growth and return expectations, they are disappointed. With the biggest Chinese IPO in New York in 2017 so far coming up soon, Best Logistics, it’s important to remember that a Chinese company’s IPO in New York does not necessarily mean a robust company that could provide superlative returns.

• Risks of delisting – Negative sentiment on Chinese stocks on US exchanges have led to many companies delisting and listing in China instead. Risks of a potential delisting keep US investors away from smaller Chinese stocks. Further, Chinese companies that suffer poor valuations in the US prefer to re-list in China as it is easier for them to attract investors in their country.

Matthew Kwok, chief strategist at China Yinsheng Wealth Management Ltd, addressed Gushan delisting from the US, “It’s understandable that the owner is planning to relist somewhere he can get a better valuation for his assets.”

Paul Boltz, a lawyer with Ropes & Gray LLP believes, “The Hong Kong market is not seen to have a ‘China discount’ like in the U.S. and it is thought that investors here are more likely to understand and place a higher value on Chinese companies.” He continued, “There’s a perception that investors in the U.S. markets don’t understand or bother to fully appreciate the business models of many companies operating in China.”

• Lack of transparency and understanding of business models – Lack of transparency, poor corporate governance and reporting also keeps investors away from Chinese companies. Add to this home bias and the fact that Chinese companies are known for corruption and frauds. This creates negative sentiment towards lesser-known Chinese stocks and these IPOs are largely unrecognized by US investors. Further, US investors find business models of Chinese companies complicated.

But can Best Logistics turn the tide?

However, the recently announced IPO by Best Logistics could turn the tide for Chinese IPOs in New York.

Alibaba backed Best Logistics filed an IPO in the United States to raise $1 billion to fund expansion of its parcel delivery, transportation and convenience store delivery services. This will be the biggest Chinese IPO in New York so far this year, and the connection with Alibaba will hopefully help Best live up to its name.

Alibaba owns 23.4% of the company and had a valuation of $3 billion at its last funding round in 2016. Further, the company’s revenues have nearly tripled in the last three years to $1.3 billion (in 2016) but the company is still operating at a loss. In 2016, the company reported losses of $200 million, which could be a matter of concern for potential investors.

Overall, the sentiment has not yet turned positive for upcoming Chinese IPOs and Best Logistics will be watched closely as a bellwether for help pave the way for future companies from mainland China to list in the US.