The political sparring between Washington and Beijing hasn’t dampened the interest of Chinese companies wanting to list shares in the U.S.
Chinese initial public offerings in the U.S. accounted for about a fifth of U.S. IPO proceeds in the last three months, their best quarter by proceeds in three years, according to Renaissance Capital. The firms, mostly lesser-known, smaller Chinese companies, are often drawn to the prestige associated with the New York stock exchanges.
“As a U.S.-listed company it’ll be easier to attract top talent from Chinese internet companies,” Yipeng Li, chief financial officer of Sunlands Online Education, told CNBC on the day of its IPO, March 23.
Chinese companies raise even more capital in the US
Source: Renaissance Capital. Excludes SPACs, best-efforts IPOs, deals that raise less than $5 million or have a market cap below $50 million.
“We also believe we can show our true value as U.S.-listed company. Right now all the high-quality [Chinese] education companies are listed in the U.S.,” Li said. Sunlands declined nearly 13.3 percent Thursday and has a market cap of about $1.5 billion.
Eight Chinese companies raised $3.3 billion in the first quarter, the most in three years, thanks primarily to a $2.3 billion raise by video streaming company iQIYI, Renaissance said.
More may be coming. Drew Bernstein, co-head of the China practice at Marcum Bernstein & Pinchuk, an auditor of Chinese IPOs in the U.S., said he’s working right now with about six or seven offerings and that he’s accepted at least four more clients.
“Many Chinese want to immigrate to the U.S. [and having corporate name recognition] eases access for immigration to them,” Bernstein said.
President Donald Trump has targeted China with plans for tariffs and increased scrutiny of Chinese deals in the U.S. The value of completed Chinese foreign direct investment transactions in the U.S. dropped by over a third from 2016, and the worth of newly announced deals dropped by more than 90 percent, according to Rhodium Group.
Meanwhile, Beijing has been trying to limit capital flight and is reportedly encouraging large Chinese companies to list in mainland China through a “Chinese Depositary Receipt” or “CDR” system.
“Based on news reports and announcements made by Chinese government agencies so far, we think CDR issuance will probably be launched in 2H18,” Morgan Stanley equity strategists said in a March 19 report.
Sunlands’ Li said he doesn’t think the political tensions between the White House and Beijing will affect his business, and the firm doesn’t have plans to hold a secondary offering in mainland China. For many Chinese companies wanting to go public in the U.S., their stated international ambitions coincide with a national push for Chinese firms to go overseas.
“For now, the U.S. market is still considered to be a better place for price discovery for tech valuations so we still expect to see Chinese listings here,” said Kathleen Smith, a principal of Renaissance Capital, which is a provider of IPO ETFs and institutional research, in an email.
“However, in the long run as Asian markets evolve, it makes sense that Chinese companies will list in their local markets,” Smith said.
Despite the rush to list in the U.S., the latest Chinese offerings haven’t done that well so far. For example:
- Sunlands has lost nearly 25 percent for the week.
- Animation-focused video streaming site Bilibili (Ticker: BILI) opened Wednesday $1.70 below its IPO pricing, and the $3 billion stock closed 2.1 percent lower for the day Thursday.
- The much larger iQIYI (Ticker: IQ) tumbled 13.6 percent in its debut Thursday. The stock offering counts Goldman Sachs as an underwriter and is the biggest IPO of a Chinese company in the U.S. since e-commerce and tech giant Alibaba went public in 2014, according to Renaissance.
As is the case with any security, investors will need to do their own research.
The documentary “The China Hustle,” which hits theaters Friday, warns investors the last time a slew of Chinese IPOs hit the U.S. market roughly a decade or more ago, pension funds and retirement funds lost at least $14 billion to Chinese stocks that turned out to be frauds. The film claims that Chinese financial markets are now even more entwined with the global system, and calls for more regulation.
“I don’t think there’s anything changed other than that the fraud has gotten more complicated and sophisticated,” said Dan David, co-founder of the GeoInvesting hedge fund that is featured in the documentary. “I don’t think that all the Chinese-based IPOs are connected to fraudulent activity, but they all could be and they won’t be breaking the law in China.”