Great Wall of Obstacles: Can Chinese Companies Go Public in the U.S. in 2024?

Intralinks Mergermarket Dealcast M&A Podcast

Amid geopolitical tensions and regulatory hurdles, Chinese companies face daunting challenges when going public in the U.S. Nevertheless, Shein, the fast-fashion retailer, remains undeterred in its pursuit of a long-rumored initial public offering. Similarly, Zeekr, the high-end electric car brand owned by Zhejiang Geely Holding Group Co., has dipped its toes into IPO waters by filing with the SEC. This episode delves into the obstacles confronting both Chinese firms and provides insights into recent developments in IPO listings.

Dealcast is presented by Mergermarket and SS&C Intralinks.


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Julie-Anna (00:05): Hello and welcome to Dealcast, the weekly M&A podcast presented to you by Mergermarket and SS&C Intralinks. I'm Julie-Anna Needham. I'm a business journalist who's been covering M&A for a decade now. A major Chinese company is looking to list in the U.S. that's Shein, the fast fashion clothing company that's all over TikTok. But for Shein and other Chinese groups, seeking a US listing is not exactly easy. To find out more, I'm joined by Troy Hooper, who's head of Pre-Event Equity Capital Markets for Mergermarket in the U.S. Hi, Troy. Thanks very much for joining me.

Troy (00:49): Hi, Julie-Anna.

Julie-Anna (00:50): So, we last spoke in the summer when we talked about the wider ECM market in the U.S.. Can you give me a very brief overview of how it's looking now at the end of 2023?

Troy (01:02): Yeah, the ECM market has been disappointing. There were very few IPOs this year and most of the listings that did occur are trading below their first day price follow-on offerings and convertible debt deals have kept the ECM market afloat, but everyone is really waiting for the IPO window to fully open. There's a huge backlog of companies waiting and wanting to go public in the technology sector. For example, there were five IPOs this year and only a couple last year, and usually we see 35 to 40 tech IPOs in the U.S. every year. So if market conditions are favorable next year, it could be a relative bonanza for the sector.

Julie-Anna (01:39): Thanks, Troy. So today we are focusing on Chinese companies looking to list in the us. We've had a few major IPOs being announced recently, the big one being Shein, the fast fashion company, which is already causing a whole heap of controversy in the U.S. and there's also Zeekr, the electric car company owned by Geely. Now the head of China for the New York Stock Exchange has said there's strong appetite for Chinese companies listing as demonstrated by these two Shein and Zeekr, but it's challenging. Can you expand a bit more on that and run through what those hurdles are for Chinese companies looking to list in the U.S., including the regulatory hurdles, please?

Troy (02:20): Yes, that's right. Julie-Anna. As U.S.-China relations have broken down in recent years, authorities on both sides have implemented strict disclosure and data compliance regulations that don't make it easy for Chinese companies to list. In the U.S., two and a half years ago, you might remember there was a Chinese ride-hailing firm called Didi that floated and eventually delisted from the New York Stock Exchange after it came under pressure from Chinese regulators. This year there have been 20 Chinese companies to list in the U.S. collectively raising nearly USD 600 million according to Dealogic. And that's an improvement from last year when only 11 companies raised about USD 470 million from U.S. listings. But typically, or what I should say is this year and last year were just a fraction of what we saw in 2020 and 2021 when listings total close to USD 13 billion each of those years.

Julie-Anna (03:21): Thanks, Troy. So in a slow US IPO market, do you think investors will be open to Chinese IPO stories and perhaps we can use Shein and Zeekr as examples?

Troy (03:32): That's a great question. So far it's not looking good. The aftermarket performance of the 20 Chinese companies that went public in the U.S. this year has not been stellar. Only eight of them are trading above their listing price and these were not big listings. Of those eight, the biggest only raised USD 69 million and the largest of the losers is the company called Hasi Group, which raised about USD 190 million in its offering and its stock has lost just about half of its value. So Shein faces a real test. It moved its headquarters to Singapore, but its Chinese roots and operations there won't protect it from regulatory scrutiny. There has been concern around its labor and copyright practices that a U.S. House committee is investigating right now. Zeekr also has challenges. It planned to go public last month, but after feeling out investors, it decided to postpone its listing. The valuation Zeekr expected to get was not what investors were willing to pay. It also cut the amount of the plan to raise in half from USD one billion to 500 million. Likewise, this month, another Chinese firm ZKH Group, which provides procurement services for industrial supplies, it lowered, it's the amount it's looking to raise in its IPO as well. It's refiled, its IPO paperwork a few times and cut. Its raise from USD 300 million down to USD 66 million. So that's quite a haircut.

Julie-Anna (04:59): So Shein's executive chairman was apparently in London recently exploring the option of listing the company on the London Stock Exchange. Now its USD 90 billion valuation has been disputed. Is there an additional valuation discount to pricing for the cross-border and regulatory risk, or is the pressure seen on valuations the same for all potential issuers across the board?

Troy (05:27): There is some disagreement about that amongst advisors. Some are saying the regulatory risks and questions around its business practices will weigh heavily on its listing. Others believe that U.S.-Chinese relations are improving and that broader macroeconomic factors are much more important. The company reportedly registered a down round in May when it raised 2 billion at a USD 66 billion valuation, which was lower than its 100 billion-dollar valuation last year.

Julie-Anna (05:55): And what are investors saying? What's the feedback from investors that you've spoken to?

Troy (05:59): The investors I've spoken to aren't very excited about the Chinese listings. There are so many other opportunities that are expected to come online next year in terms of US tech companies that a lot of people have been anxious to see go public. I think there's much more excitement for those. That said, a lot of these cross-border opportunities, they kind of cater to a certain type of investor. So I'm sure there will be some funds that are focused on Asia that will certainly be buying these stocks.

Julie-Anna (06:34): And alongside Zeekr, there's also another Chinese-owned car company listing in the U.S. Lotus Technology, which is part of Group Lotus, which makes well-known sports cars. And that is also owned by the Chinese car company Geely. But Lotus Tech isn't going down the IPO route to get its listing. Can you tell us a bit more about that, please?

Troy (06:56): Yes. Lotus Tech is going public through a merger with a special purpose acquisition company, also known as SPACs, if you remember those. And this particular SPAC was formed by affiliates of the investment firm L Catterton, and it's been about a year since they made the announcement about the merger. So it's been a very slow process. But a few weeks ago, Lotus and L Catterton secured USD 870 million in a private investment in public equity financing, which will support that merger. So it looks like it's going to get the green light.

Julie-Anna (07:31): And presumably that route requires quite a lot less scrutiny and a lot less administration and filings.

Troy (07:38): Yes, that's right. Typically SPAC mergers are simplified for the two businesses since it's a merger rather than a public listing. So typically it is easier to get through that regulatory process.

Julie-Anna (07:54): Great, thank you. And Lotus Tech and Zeekr are both in the electric vehicle sub-sector. Shein is fast fashion. Can you talk through the key sectors that Chinese issuers could find success in U.S. listings, please?

Troy (08:09): Yeah, the EV market seems to be the most attractive right now because the potential there is massive. You have Chinese companies that are expected to be major players in the industry in years to come, and they can challenge the leaders like Tesla with more affordable price points. So that's a big opportunity going forward. Otherwise, we'll have to see how Sheen and ZKH performed to get a better idea of whether other sectors like consumer or industrials might also present new opportunities for investors.

Julie-Anna (08:41): So it sounds like there is potentially the appetite there, but it's not going to be easy for any of those Chinese companies looking to list in the U.S. anytime soon.

Troy (08:51): That's right. I think unless U.S.-China relations really improve, all these companies are going to face regulatory risks as well as a hesitant response from investors.

Julie-Anna (09:06): Brilliant. Thanks very much, Troy.

(09:09): That was Troy Hooper, head of pre-event equity capital markets for Mergermarket in the U.S.. Thanks for listening to Dealcast presented by Mergermarket and SS&C Intralinks. Please rate to review and follow the podcast. You'll find us on Apple Podcasts, Spotify or look out for your Mergermarket news alert. For more information. Have a look at our show notes. Join us again, next week.