For Topsy-Turvy Tech IPOs, Triton Warns ‘Justice Will Come’

(Bloomberg) -- Chaotic trading in this year’s technology IPOs will eventually right itself, but not before another group of Chinese firms list on U.S. exchanges this week, Triton Research Inc. says.

With three more U.S. listings expected this week by technology companies based in Shanghai, the research firm that specializes in tech IPOs rates all three as below-average opportunities. But this year’s IPO returns represent a break from five years of more predictable trading, when companies with high Triton ratings consistently outperformed those seen as lower quality.

“The world’s a little weird right now,” said Rett Wallace, Triton’s chief executive officer. “The market seems to have an appetite for low-scoring Chinese companies. You have a test coming with some of these companies that are just notably low-scoring.”

Offerings by electric car-maker Nio Inc. and digital healthcare platform 111 Inc. are both expected to price tonight, while an IPO by Tencent-backed news aggregator Qutoutiao Inc. is set to price Thursday post-market. Triton scores Nio as a 5.93, while 111 gets a 5.42 and Qutoutiao a 4.95, all below the firm’s five-year average score of 6.25.

Despite their low ratings, anomalous trading in this year’s other listings from China suggests they could still surge out of the gates. IPOs in 2018 with below-average Triton scores have risen an average of 47 percent, the firm says, when they should be up about 14 percent. Conversely, some companies considered higher quality are not capturing as much of the euphoria.

“You have really low-scoring companies trading better than they should and well-scoring companies like Dropbox trading worse than they should,” Wallace said. “We see that over time, the scores get priced into these things. That’s what gives us conviction that if you see something with a bad score, justice will come.”

Chinese technology companies have been flocking to U.S. exchanges this year, as their domestic exchanges feel the worst of a budding trade war between the two nations. But for overvalued stocks, comeuppance may arrive alongside their first quarterly prints as a public company, Wallace warned.

“We saw it with Snap,” he said. “People fell out of love almost immediately after the first quarterly announcement and it never recovered. There’s a narrative people have in their mind, especially because these Chinese companies have such fast growth. Once you start to see the performance trends and unit economics, it can debunk that story.”

To contact the reporter on this story: Drew Singer in New York at dsinger28@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Brad Olesen, Jeremy R. Cooke

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