Corporate Financing Analysis - Chinese Floats Returning To The US In Growing Numbers - 13 NOV 2017


US equity capital market (ecm) investor confidence in Chinese stocks is returning. After several years of accounting scandals from 2010 onwards, which served to damage the reputation of Chinese firms listed in the US, and in some cases forced firms to delist from either the New York Stock Exchange (NYSE) or the Nasdaq bourse altogether, Mainland firms from the Middle Kingdom are proving to be popular with investors when they choose to list outside of their domestic borders.

Qudian's Bumper Deal
US-Listed Chinese FinTech Companies By IPO Size, USDmn
Source: China Money Network , BMI

Deals More Frequent And Larger

Led by e-commerce giant Alibaba's USD22bn, 2014 float ( See ' Wall Street Braces Itself For Alibaba Float ' , September 11 2014), the volume of companies making the trip across the Pacific to list on US exchanges has been increasing, and so too have the size of the deals which they have been making there too. Data from Dealogic shows than ten firms from Mainland China have successfully tapped US investors for capital in the y-t-d period. This represents a more than two-fold increase on the four successful deals to list in the US during the y-t-d period last year, and above the six such deals recorded a year earlier during the equivalent period in 2015. Only the 2014 y-t-d haul of twelve deals ranks higher in the aftermath of when the accounting scandals began. In terms of deals size, Dealogic data shows that the average valuation of Chinese floats is creeping higher once more; however, we highlight that they still have a long way to go before they will reach the former highs recorded in the 2014 to-date period, although we are quick to point out that the average deal size will have been distorted by the completion of the enormous Alibaba float that year.

US Stocks Outperforming

With US stocks outperforming those in China over recent months and quarters, the lure of an overseas listing for Chinese firms is certainly appealing. Indeed, Bloomberg data correct to the start of the day on November 6 2017 shows that the benchmark S&P500 index in the US has returned 15.59% in the y-t-d period and, even more impressively, is up by 26.64% y-o-y. The index has outpaced the Shanghai Stock Exchange Composite Index (SHCOMP), which is up by 9.00% in the y-t-d period and by 10.46% y-o-y, and significantly outperformed the Shenzhen Composite Index (SZCOMP), which has gained 1.46% in the y-t-d period but which is still down by 2.51% from where it stood a year previously. This is hardly surprising given that China's growth story is starting to falter, with economic growth in the coming decade set to be much slower than in the last ten. BMI is currently forecasting the country's real GDP growth rate to average 5.7% through to 2028.

Welcomed By US Investors

The most recent Chinese company to make the trip across to the US to successfully list was small, short-term loans provider Qudian - a firm only founded as recently as 2014 and which first posted an annual profit last year. The firm's USD900mn IPO on the NYSE, which successfully entered into the top five Chinese listings in the US by deal value in the 2017 y-t-d period, was well received by investors. Indeed, Beijing-based Qudian's stock priced 17% above its indicative range (USD19-USD22) at a price of USD24, traded up 22% on its debut, and finished its first week on the NYSE some 38% above where it had originally started. Morgan Stanley, Credit Suisse, Citi, CICC and UBS Investment Bank acted as lead managers on the deal. In our view, Qudian's support from Alibaba, through the firm's partnership with online payment platform Alipay which is operated by the latter's affiliate Ant Financial, can only have helped to lure investors to the 37.5mn American Depository Shares (ADS) shares on offer. Morgan Stanley, Credit Suisse, Citi, CICC and UBS Investment Bank acted as lead managers on the deal, which have a market value of as much as USD7.9bn.

Chinese issuers made plenty of noise in Q317 too, with three of the largest IPOs in the US during the three-month window through to September 30 coming out of China. Within this, another Alibaba-backed firm went public: the USD450mn IPO of delivery firm Best which had originally filed to raise USD1bn, but ended up raising less than half that amount. Like Qudian, Best has also enjoyed success in the aftermarket following its September 19 float and saw its stock climb by a relatively modest 5.2% on its debut before then later jumping up by 19.7% by the close of the third-quarter - data from Renaissance Capital shows. In our view, this suggests that US investors still remain hungry to buy into the Chinese growth story, a 'pull' factor which is, in itself, luring potential Chinese Mainland issuers across to US exchanges once more.

There are, of course, exceptions to the rule, and online luxury retailer Secoo's pricing of its September 21 float at just above the midpoint of its proposed range represented just that. With its stock down by as much as 23.1% in the one-day aftermarket following its USD111mn listing, the firms holds the unwanted title of having the worst US public market debut for a Chinese company in almost seven years. And the trouble did not stop there: by the end of Q317, its share price was lower still at a level of 31.5%. By and large, however, Chinese floats in the US have seen their stock become sought after by ecm investors both during the listing process and in the aftermarket.

Tech In Focus

Moreover, we highlight that the deal also shows a renewed hunger for high-growth, tech-linked deals, with both investors and potential issuers hoping to enjoy the same success that Alibaba has on US public bourses. Indeed, Alibaba's y-t-d return of 96% shows both potential issuers and investors what could be achieved. Indeed, at a time when US venture capital (VC) firms are failing to record floats, their Chinese counterparts are making up the numbers, driven by Beijing's strengthening support of the sector. We point to the sector being given a real boost back in February 2017 when China's 13th Five Year plan was released, which will be guiding the country's growth over the second half of the decade to 2020. The latest Five-Year Plan sees China aiming to restructure the economy towards a consumption-based one, led by the high-tech sector. Within this, we highlight a strengthening focus on innovation which has, in turn, fuelled the growth of the local and burgeoning VC industry. As such, we expect the sector to not only be a key driver for the Chinese economy over the coming years, but also a further contributor of Chinese floats in the US for deals going forward too ( see ' China ' s IPO Run To Slow After CSRC Intervention ' , June 7 2017). We highlight that among the deals looking to potentially follow in Qudian's recent footsteps are wealth management platform Jianpu Technology, which is reportedly targeting a USD200mn float, and online marketplace lender Dianrong, fellow online lender Lexin.com, and Lu.com, which are all considering filing with the SEC to go public in the US next year.