China IPO Review: Offering sizes halved in March, Luckin scandal to weigh on investor confidence

A digital display in Hong Kong shows stock market figures. Photo: Leung Cho Pan

IPO activity of Chinese firms continued to be sluggish in March and the pace is likely to last a few months as aspirants hold back from going public amid continued market volatility. The alleged accounting frauds of Chinese-listed firms in the US, including Luckin Coffee, have further eroded investor confidence.

Initial public offerings (IPOs) of companies based in Greater China – predominately in the mainland and Hong Kong – have more than halved in March 2020 as 26 firms raised about $2.02 billion in total, compared to February when 27 companies floated IPOs worth just over $4.26 billion, according to proprietary data compiled by DealStreetAsia.

The number represents a continued decrease since January, when the novel coronavirus started sweeping across the country, forcing most businesses into a near standstill. In January, when the impact of the pandemic was hardly felt, 39 China-based companies garnered more than $7.39 billion in their IPO offerings.

The report tracks IPOs of Greater China-based companies on one of the eight IPO destinations surveyed: the STAR Market, the Main Board of the Shanghai Stock Exchange (SSE), the Shenzhen Stock Exchange (SZSE), which is composed of the Main Board, the ChiNext Market, and the SME Board, as well as the Hong Kong Stock Exchange (HKEX), and America’s Nasdaq and New York Stock Exchange (NYSE).

In our monthly IPO analysis, we have put together detailed charts and dissection of prominent IPOs of companies based in Greater China, their PE/VC investors, and industries that enjoyed more listings than others between March 1 and March 31, 2020. (Exchange rate of $1 = 6.95 yuan/HK$7.77.)

The implosion of US-listed Chinese firms makes investors wary

As many countries have imposed travel limits and social-distance measures to control the spread of the deadly virus, “distancing” between Chinese IPO hopefuls and their international investors has also surfaced in the past month.

There were no new listings of Chinese firms in the US in March, partially due to the travel restrictions that the Trump administration imposed on China, which went into effect on February 1 and made it almost impossible for China-based management teams to travel and proceed with their IPO plans.

As Chinese candidates are more likely to shift to the domestic secondary market for capital, the HKEX has gained more traction in the month as 13 companies, or half of the new issuers raising a combined $591.57 million on the city bourse. Nine of the 13 newly-listed Chinese firms are based in mainland China – a stellar performance compared to February when only two new listings from Hong Kong-based firms were recorded.

Furthermore, a series of developments associated with Chinese companies listed in the US surfaced in recent weeks. Nasdaq-listed Chinese coffee chain operator Luckin Coffee, which raised $645 million after fully exercising the greenshoe option in May 2019, disclosed on April 2 that its chief operating officer, Liu Jian, and other employees had fabricated sales transactions.

New York-listed Chinese after-school education provider TAL Education said on April 8 that it had discovered the same misdeed, while Nasdaq-listed video streaming firm iQiyi is also involved in a scandal, in which short-sellers claimed that the company had made up its revenues.

The latest series of incidents could still lead to a new wave of crisis in investor confidence.

“It will be very difficult for any China-related firms to go public internationally, or in the US, for quite some time [after the series of scandals],” said William Bao Bean, general partner of US-based venture capital firm SOSV. He serves as the managing director of SOSV’s investment unit Chinaccelerator, with extensive investment experience in China and Southeast Asia.

“There is already an increasingly negative view of anything having to do with China, [particularly] in America,” said Bao, referring to the long-lasting Sino-US trade spats and the origin of the coronavirus pandemic. The scandals are just “the cherry on top,” he said.

The implosion of these US-listed Chinese companies could not have come at a worse time. Deloitte statistics show that most of the six Chinese firms that rang the bell in the US in the first quarter of 2020 have seen their prices fall below targets.

In 2019, Chinese companies’ fundraising on Wall Street fell by over 50 per cent after many companies were forced to trim their valuations and place reliance on existing investors to get their IPOs across the finish line. The number of new Chinese listings on Nasdaq and the NYSE fell to 25 companies in 2019 from 33 in 2018, while the total funds raised in the deals plummeted from $9.2 billion to $3.4 billion, according to Dealogic.

The future of these US-listed scandal-ridden Chinese players seems to be doomed. Shares of Xiamen-based Luckin Coffee, once touted as China’s Starbucks rival, have tumbled over 80 per cent since the revelation, wiping roughly $5 billion off its market capitalization.

“Whenever one of these scandals comes out, the market multiples of [their] US-listed Chinese peers will be compressed for months, and sometimes a year and more, before the market rebuilds trust and brings the average multiples up for Chinese companies,” said Bao. He added that Luckin Coffee might not be able to tap the capital market again and go bankrupt in “the worst scenario.”

Fewer VC/PE exits

There were relatively fewer exits in March. Fifteen Chinese new issuers, or nearly 57.69 per cent of all IPO-ed firms, were backed by private equity or/and venture capital investors before their shares are traded on one of the eight IPO destinations surveyed. The number has dropped compared to 55 VC/PE-backed IPOs, or over 81.48 per cent of all newly-listed companies, in the month earlier.

Investment companies who enjoyed the IPO of their portfolio in March are largely China-based investors little known in the western world. Noticeably, each of these investors saw no more than one IPO in the past month, unlike in February when Shenzhen-based Fortune Capital reaped returns from five portfolio firms that raised a combined $492 million on boards in the mainland and the US.

As China’s hyper-active VC market saw two colossal deals worth $1 billion and above surfacing in March after a hiatus of months, the country’s growth-stage companies are more likely to continue fundraising while having a wait-and-see attitude for “a better market window” before they move towards an IPO in the following months.

“Generally speaking, over the last couple of years, Chinese companies haven’t shown great performance post-IPO,” said Tang Chibo, partner of China-based venture capital firm Gobi Partners. He said that “an anti-China sentiment” in the US has played a factor in it.

“It actually makes sense for companies to wait for a better market window, instead of going through the whole [IPO] process and take on all those extra expenses, only to see their stock prices fall,” said Tang.

The trend is particularly pronounced when the Chinese stagnant IPO market is compared with the dealmaking activity in the country.

DealStreetAsia’s statistics show that Chinese firms collected an aggregate of over $6.13 billion across 68 new transactions in March 2020 – a record-high amount in the past six months – largely on account of two billion-dollar transactions and eight other deals worth $100 million and above.

The combined deal value of over $6.13 billion represents a 580.23 per cent leap from $901.25 million in February, while deal volume doubled from 34 to 68 month-over-month.

Despite being far outperformed than many of their unicorn peers in terms of fundraising and valuation, the two Chinese companies who raised the largest rounds in the past month, Beijing-based real-estate brokerage platform Beike Zhaofang and online education unicorn Yunfudao, have yet to make any announcements and move towards an IPO on the secondary market.

Nate Lee, a Chinese serial entrepreneur who hosts a VC/PE-related show with about 137,000 subscribers on YouTube, said that investors’ interest in early-stage companies will heighten since the recent IPO performance has been “barely satisfactory” over the coronavirus panic.

“… Especially when the market capitalization [of a listed portfolio firm] stood lower than the valuation that had been endorsed by their institutional investors before the IPO,” said Lee. “The situation means that only early-stage investors who had chipped in at a lower price could gain investment returns, while latecomers would have to suffer from losses.”

While the SSE topped the world’s IPO destination list in the first quarter of 2020, it was largely due to the 30.7 billion yuan ($4.5 billion) IPO launched by Beijing-Shanghai High Speed Railway, a state-owned operator of the rail link between China’s two biggest cities.

15 VC/PE-backed IPOs in March 2020

Expand Table

HeadquartersCompany NameIPO LocationListing DateIPO Size (Million USD)PE/VC Shareholders (Before IPO)Sector
BeijingRocKontrol Technology Group Co LtdSTAR Market2020-03-20141.29Gongqingcheng Huayun Investment Management (共青城华云)IoT
Dongguan (Guangdong)Ucap Cloud Information Technology Co LtdSTAR Market2020-03-27143.17Longma Capital (宁波龙马), Zichen Venture Capital (广东紫宸), Changrun Capital (深圳长润)Big Data
ChangshaHunan Nucien Pharmaceutical Co LtdSTAR Market2020-03-26175.97Hunan Xiangtou Holdings Group, Qianyuan Capital (广州乾元), CDH Investments, Hunan Xiangjiang Healthcare Venture Investment Partnership (湘江大健康), Houshui Investment (厚水投资)Health Tech
NingboXuelong Group Co LtdSSE Main Board2020-03-1068.20Lianzhan Investment (联展投资)Automotive
Jiande (Zhejiang)Zhejiang Jianye Chemical Co LtdSSE Main Board2020-03-0282.01Jianye Investment, Jiande State-Owned Assets ManagementManufacutring (Chemicals)
BeijingIAT Automobile Technology Co LtdSZSE ChiNext2020-03-2767.48Junwen Yinbao (珺文银宝), Yueda Investment (悦达投资), Pufeng Xingye Venture Capital (普丰兴业), Kailian Xinrui Investment (凯联新锐)Automotive
ShenzhenShenzhen Bestek Technology Co LtdSZSE ChiNext2020-03-1390.50Taiping Dingsheng Investment (泰萍鼎盛), Yilong Dake Investment (奕龙达克)Hardware
Wujiang (Jiangsu)Jiangsu Jujie Microfiber Technology Group Co LtdSZSE ChiNext2020-03-1253.96GP Capital (金浦投资)Manufacturing (Textile)
Zibo (Shandong)Shandong Dongyue Organosilicon Materials Co LtdSZSE ChiNext2020-03-12297.84Cheung Shek InvestmentManufacturing (Chemicals)
TianjinTJK Machinery (Tianjin) Co LtdSZSE ChiNext2020-03-1955.83Shanghai Capital (上创信德), Binhai Angel Venture Capital (滨海天使)Manufacturing
SuzhouSuzhou Cheersson Precision Metal Forming Co LtdSZSE SME2020-03-0668.35Zhongquanxin Investment (众全信投资)Manufacturing
GuangzhouJiu Zun Digital Interactive Entertainment Group HoldingsHKEX Main Board2020-03-1721.89Liang Junhua, Lu Jian, He Junhong, Su Shaoping, AE Majoris Tech, AEM PIPOMedia & Entertainment
FuzhouJianzhong Construction Development LimitedHKEX Main Board2020-03-1833.18MHX Investment BVI, Xun MH, Anhui Conch Venture InvestmentReal Estate (Construction)
Shantou (Guangdong)Kidztech Holdings LimitedHKEX Main Board2020-03-1815.70Top Synergy, Song Nannan, Xu Jianxin, Ng Mo SumConsumer & Brands
BeijingInnoCare Pharma LimitedHKEX Main Board2020-03-23228.33Vivo Funds, Golden Valley Global Limited, Hankang Biotech Fund I, Magic City Group Limited, 3H Fund, GICHealth Tech

Manufacturing sector gains momentum

Nine Chinese manufacturing firms have collected an aggregate of almost $724 million before their shares started trading on the public market in March, which represents a 57.09 per cent growth compared with $461 million across seven IPOs in February.

China’s manufacturing industry has remained as the most active sector in terms of the number of IPOs since 2020. The segment is also gaining momentum in the recent three months since the funds raised in new offerings of each month have been increasing exponentially. The number had vaulted 164.14 per cent in February from $174 million in January.

Dongyue Organosilicon Materials, an organic silicon materials manufacturing subsidiary of Hong Kong-listed Dongyue Group, raised 2.07 billion yuan ($298 million) in the biggest IPO in March on the ChiNext Board of the SZSE. Dongyue Group continues to remain as the largest shareholder of the firm with a 57.75 per cent stake, while technology investment fund Long Capital holds a 7.5 per cent stake post the listing.

In another IPO worth over $100 million in the manufacturing field, plastic flooring production and export business Elegant Home-Tech sold 60 million shares for 774 million yuan ($111 million) in an IPO on the Main Board of the SSE.

Companies in the real estate area came second in terms of the number of IPOs in the past month, yet they fell short of their domestic peers in the healthcare industry on total funds raised across their offerings.

Four real estate-related firms secured nearly $95 million with all deals being well below $50 million, while two Chinese pharmaceutical companies have garnered over $464 million in their IPOs:

  • Beijing-based InnoCare Pharma became the first IPO to debut through a virtual bell-ringing ceremony on the HKEX, following similar events in both Shanghai and Shenzhen boards. Backed by marquee investors like China’s CCB Capital and Shanghai-based PE Loyal Valley Capital, InnoCare priced a $288 million transaction at the top of its range amid a partial lock-down that has now lasted for over two months in Hong Kong.
  • Chinese state-owned Hunan Nucien Pharmaceutical went public on the STAR Market to raise more than 1.22 billion yuan ($176 million).

After the IPO, Hunan Xiangtou Holdings Group, an investment arm of the local government in southern China’s Hunan province, remains as its largest shareholder with a 28.57 per cent stake, while China’s Guangzhou Qianyuan Investment Company comes second at 15.71 per cent. Chinese alternative asset management major CDH Investments owns 10.71 per cent shares in Nucien.

There were three new issuances worth $100 million and above in March in big data, internet of things (IoT), and media & entertainment:

  • Ucap Cloud, which provides internet services and big data solutions to enterprises and government bodies, raised 995 million yuan ($143 million) by selling 16.78 million shares on the STAR Market. Prior to the IPO, the Guangdong-based company had completed at least three funding rounds from domestic investment companies such as Longma Capital (宁波龙马), and Changrun Capital (深圳长润).
  • RocKontrol Technology Group, which develops IoT technology for applications in the smart city and intelligent architecture space, gathered 982 million yuan ($141 million) before the company sold 19.33 million shares at a price of 50.81 yuan ($7.31) apiece on the STAR Market.
  • China Bright Culture Group, a company that primarily produces TV variety shows in the mainland, floated an HK$904 million ($116 million) IPO on the HKEX. The company sold 400 million shares at the lower side of its proposed IPO size between HK$900 million (almost $116 million) and HK$1.35 billion ($174 million).

Top 10 IPOs of Greater China-based firms in March 2020

Expand Table

HeadquartersEnglish NameIPO LocationListing DateIPO Size (USD Million)PE/VC Shareholders (Before IPO)Sector
Zibo (Shandong)Shandong Dongyue Organosilicon Materials Co LtdSZSE ChiNext2020-03-12297.84Cheung Shek InvestmentManufacturing (Chemicals)
BeijingInnoCare Pharma LimitedHKEX Main Board2020-03-23288.33Vivo Funds, Golden Valley Global Limited, Hankang Biotech Fund I, Magic City Group Limited, Loyal Valley Capital, 3H Fund, GICHealth Tech
ChangshaHunan Nucien Pharmaceutical Co LtdSTAR Market2020-03-26175.97Hunan Xiangtou Holdings Group, Qianyuan Capital (广州乾元), CDH Investments, Hunan Xiangjiang Healthcare Venture Investment Partnership (湘江大健康), Houshui Investment (厚水投资)Health Tech
Dongguan (Guangdong)Ucap Cloud Information Technology Co LtdSTAR Market2020-03-27143.17Longma Capital (宁波龙马), Zichen Venture Capital (广东紫宸), Changrun Capital (深圳长润)Big Data
BeijingRocKontrol Technology Group Co LtdSTAR Market2020-03-20141.29Gongqingcheng Huayun Investment Management (共青城华云)IoT
BeijingChina Bright Culture GroupHKEX Main Board2020-03-13116.34NAMedia & Entertainment
Zhangjiagang (Jiangsu)Zhangjiagang Elegant Home-Tech Co LtdSSE Main Board2020-03-23111.37NAManufacturing (PVC Flooring Products)
ShenzhenShenzhen Bestek Technology Co LtdSZSE ChiNext2020-03-1390.50Taiping Dingsheng Investment (泰萍鼎盛), Yilong Dake Investment (奕龙达克)Hardware
Jiande (Zhejiang)Zhejiang Jianye Chemical Co LtdSSE Main Board2020-03-0282.01Jianye Investment, Jiande State-Owned Assets ManagementManufacutring (Chemicals)
ChengduChengdu Tianjian Technology Co LtdSZSE SME2020-03-1777.27NASpace Tech

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.