Struggling Chinese Tech Debuts Don't Bode Well for Unicorn IPOs

(Bloomberg) -- The struggles of Chinese tech startups that went public in the past year is a bad omen for the slew of unicorns looking at initial public offerings.

Smartphone maker Xiaomi Corp. and ride-hailing giant Didi Chuxing are among at least 23 Chinese tech startups eyeing IPOs in Asia and the U.S., according to data compiled by Bloomberg. But the performance of those that listed in the past year doesn’t augur well for them.

Two-thirds of the 21 tech IPOs in the past year are below their issue price, with shares down an average of about 20 percent through Friday. Leading the wipe out are online financing platforms Qudian Inc. and PPDai Group Inc., which plummeted 55 percent and 48 percent respectively, while search engine Sogou Inc. has tanked 27 percent.

The extraordinary surge in private valuations that has seen China sprout 164 companies worth at least $1 billion now presents a challenge in public markets. The liquidity that’s expected to be drawn for the IPOs is so substantial that investors are concerned about a cash crunch in the city of Hong Kong. Compounding the problem is a more sober assessment of growth, with titans Tencent Holdings Ltd. and Alibaba Group Holding Ltd. well off earlier record highs.

“These Chinese companies are getting to a point where they need to get funding from the public market and many will try to stretch valuations as high as possible," said Julia Pan, a Shanghai-based analyst at UOB Kay Hian. “As you saw with the price tank for the companies that listed last year, if their business can’t support it, they will fall back down.”

The IPOs that’ve held their own over the past year, have tended to be backed by China’s largest internet corporations, including Tencent Holdings Ltd.’s China Literature Ltd. and Baidu Inc.’s iQiyi Inc. But they’re in the minority.

The clouds hanging over recent listings range from concerns about their ability to cope with emerging regulation, the intense competition of China’s tech scene to questioning their legitimacy.

Prominent short sheller Carson Block has targeted China Internet Nationwide Financial Services Inc., saying that almost none of its lending business was real and that the only person taking out loans was its chairman. While the Beijing-based company rejected the accusations, its shares are still down nearly 50 percent since its November high.

For Qudian, investors have been spooked by the Beijing-based company’s inability to address concerns about regulatory crackdowns. It has yet to secure licenses that could be needed for non-deposit lending operations and has told investors it can’t assure them that “past or existing practices would not be deemed to violate any existing or future laws, regulations and governmental policies.” PPDai also said it might not meet a deadline to comply with certain regulations that require companies to get rid of prohibited loans.

“Regulatory uncertainty is a huge overhang on the sector," said Dexter Hsu, a Taipei-based analyst at Macquarie. "It’s the mid-sized companies that are having the hardest time and consolidation might happen down the road."

Sogou typifies how quickly the Chinese tech scene can change. While much of its appeal came from being the sole search provider on Tencent’s enormous WeChat platform, since the social network giant started offering its own search service, Sogou’s position has weakened its position and contributed to the stock’s decline.

Some of that concern about the sector has already started to affect the looming IPOs.

Xiaomi, which filed on May 3 to go public in Hong Kong, had been targeting an eye-popping $100 billion valuation for its debut but is now eyeing $60 billion to $70 billion, people familiar with the matter have said.

Inke Inc., a Chinese live streaming app that is reported to be seeking $300 million in its IPO, filed to go public in March but has yet to get clearance for a listing. While the company says it’s the second-largest live video-streaming platform by revenue and paying users, competitors including YY Inc. and Momo Inc. are larger in both metrics. On top of that, the company is besieged by newcomers like Douyin that offer shorter video uploads while Inke’s active users, paying users and revenue are all falling.

“Their figures do not look pretty,” said Pan.

Then there are companies that have lived in the shadows of titans, trying to carve out a niche in already red hot competitive sectors like e-commerce. Chinese fashion site Meilishuo, is said to be seeking an IPO for a valuation of at least $4 billion. It’s facing intense competition from sites that tap into social media promotions such as Pinduoduo, which recently was said to have raised more than $1 billion in a private funding round, and Xiaohongshu, which is said to be seeking at least $200 million of financing.

"High growth for the market as a whole is fading," said Jerry Liu, an analyst with UBS Group AG. "Companies have to increasingly focus on gaining market share and improving monetization of their products."

To contact the reporter on this story: Lulu Yilun Chen in Hong Kong at ychen447@bloomberg.net

To contact the editors responsible for this story: Robert Fenner at rfenner@bloomberg.net, Edwin Chan

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