The Music’s Stopping for Chinese IPOs Overseas

(Bloomberg Opinion) -- The window looks to be shutting for Chinese companies listing overseas.

While Tencent Music Entertainment Group rose on its New York trading debut Wednesday, trouble has been brewing under the surface. The music-streaming unit of Tencent Holdings Ltd. priced at the bottom of its marketed range, in a sign that international investors are losing their appetite for offerings from the world’s second-largest economy.

Tencent Music’s $1.1 billion sale added gloss to the biggest year for Chinese listings in Hong Kong and the U.S. since 2014, when Alibaba Group Holding Ltd. carried out the world’s biggest IPO. But the piggy bank of upcoming offerings is becoming a lot less lucrative, as rising rates dim the allure of unprofitable technology companies and as China’s economy slows.

The Music’s Stopping for Chinese IPOs Overseas

Take Hong Kong, where investors remain more wary of companies that have yet to turn a profit than their counterparts in the U.S. The city started allowing money-losing new economy firms and “pre-revenue” biotech companies to go public early this year. The resulting listings, from smartphone maker Xiaomi Corp. to food delivery super-app Meituan Dianping, are among those that are trading below their IPO prices. The Hong Kong listing of Nasdaq-traded biotech company BeiGene Ltd. is also underwater.

Firms that sold shares in the U.S., including e-commerce platform Pinduoduo Inc. and electric-car maker NIO Inc., have fared better. Still, the surprisingly weak pricing of a technology star such as Tencent Music is an ominous sign. Unlike companies such as Pinduoduo and NIO, Tencent Music is profitable, and an arm of a $390 billion internet giant.

The Music’s Stopping for Chinese IPOs Overseas

Another portent of trouble is the arrival in China of the dreaded down round. Interior design platform Qeeka Home Cayman Inc. went public in July at a valuation 29 percent below what what Hong Kong private equity firm Cachet Capital paid for its stake four months earlier. Qeeka, which is backed by Baidu Inc., raised $150 million.

That was a rare occurrence at the time. But in November, the mood changed and IPO investors turned wary. That month, four Chinese firms went public in the U.S. and Hong Kong at valuations below their last funding rounds, according to Asia Private Equity Review. They included Alibaba-backed online parenting firm BabyTree Group in Hong Kong and auto marketplace TuanChe Ltd. on Nasdaq. (Tencent Music wasn’t a down round.)

The Music’s Stopping for Chinese IPOs Overseas

Alibaba paid as much as 75 percent more than Babytree’s IPO price when it bought in at the May 28 funding round, according to the private equity database, while a Beijing government-backed fund invested in TuanChe at 20 percent more than the flotation price.

To be sure, down rounds are no stranger to U.S. firms. Square Inc., Box Inc. and Hortonworks Inc. all went public at lower valuations than they had when raising money from late-stage venture capitalists as far back as three years ago.

But their appearance in Chinese listings is a mark of the shift in sentiment. In the past, Chinese companies tended to scrap IPOs rather than accept a lower valuation. That they continue to tap the markets at the risk of burning some investors shows the sense of urgency to get sales away before the window closes.

Some sanity in valuations is welcome for China’s listing hopefuls, but this may turn out to be a painful reality check.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

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