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Chinese companies listed in US rising at a rapid rate

Q121 saw an influx of Chinese companies listed in US stock exchanges via initial public offerings (IPOs). So far, Chinese listings occupied half of the foreign public listings in the United State this year. This was in contrast to the ongoing US-China trade tensions and the Covid-19 pandemic.

Companies from mainland China and Hong Kong have raised a total of $6.6 billion in the US via IPOs in the first three month of 2021. This was an 800% increase compared with the same period in 2020, data compiled by Bloomberg shows.

If other equity deals, such as follow-on share sales and issuance of convertible bonds, are added, the total amount of money raised by Chinese listings in the US on the New York Stock Exchange (NYSE) and Nasdaq will amount to about $11 billion.

With China projected to experience a strong GDP growth this year, several Chinese companies appearing as strong performers. And investors are paying attention to these firms.

In its 2021 World Economic Outlook, the International Monetary Fund (IMF) raised China’s GDP growth forecast 0.3% to 8.4%. This was backed by the country’s effective pandemic containment, strong public investment response, and liquidity support from the central bank.

Sky-high valuations in the US market are also buoying IPO valuations of Chinese listings. The S&P 500’s PE ratio was trading at 32 times and the Nasdaq Golden Dragon index trading at around 100 times. The US market dominates global IPO issuance, accounting for 68% of the global proceeds raised through IPOs, PwC China said in its report.

Chinese listings in US outdo in the year 2020

In 2020, 35 Chinese listings raised $15 bn via IPOs in the US, up from $3.5 bn in the previous year. This was second-highest record was after the 2014 IPO of tech giant Alibaba Group Holding Ltd., which fetched a whopping $25 bn.

As per data by Dealogic, three Chinese companies have already raised $319 mn from IPOs, so far in 2021. According to NYSE chief China representative Vera Yang, around 60 more Chinese companies are planning to list in the US markets this year.

Among the biggest prospects are Byte Dance, owner of the popular short-video sharing app TikTok, ride-hailing giant Didi Chuxing, and trucking startup Full Truck Alliance. ByteDance and Didi Chuxing are two of the most valuable start-ups globally.

Other Chinese tech firms expected to list in the US include bicycle-sharing service Hello TransTech and online education platform Huohua Siwei.

Largest Chinese IPO listings in US

The largest IPO for 2021 to date is by vape manufacturer RLX Technology Inc. with $1.6 bn. It is followed by software company Tuya Inc. with $947 mn, and question and answer website Zhihu with $523 mn.

Initially targeting a price range of between $8 to $10, RLX was able to sell about 116.5 million shares at $12. The e-cigarette company that sells the RELX brand of vaping products was founded in 2018. In the first nine months of 2020, RLX earnings went up by 93% YoY to $324.2 million.

In addition, software firm Tuya Inc.’s IPO also priced above the market range. The IPO sold 43.59 mn American depositary shares at $21 against an initial target price of $17 to $20 per share. This raised the company’s market value to $11.8 billion.

On the other hand, knowledge website Zhihu sold 55 mn American Depository Shares (ADS) at only $9.50. This was the bottom of its pricing between $9.50 to $11.50.

Potential Risk of Chinese stock delisting

With companies lining up from China to float in the US stock market recently, Chinese listings face increased scrutiny from the US. China has been adamant about not allowing US regulators to examine audits due to national security reasons. As a result, this has become a major concern among some Chinese companies.

The Senate and House passed a bill Holding Foreign Companies Accountable Act last year. The bill would require foreign firms to allow oversee the auditing of their financial records to sell stocks and bonds. It grants the Securities and Exchange Commission (SEC) more authority to examine audit reports on Chinese listings. Former President Donald Trump signed bill comes amid rising trade and geopolitical tensions between the world’s two largest economies.

Non-compliance with the law could result in delisting from both the NYSE and Nasdaq.  Last year, the legislation seemed to have affected some Chinese companies conducting secondary listings in Hong Kong. This was after the approval of the bill in the Senate. These include Nasdaq-listed gaming company NetEase, Alibaba, and e-commerce giant JD.com.

However, the US-China trade tensions have not deterred the accelerating US listing trend of Chinese companies. The record number of Chinese companies listing early this year dismissed this notion. This may imply that these companies are giving more weight to the attractiveness of the US market over delisting concerns.

While the possibility of delisting stays a potential risk, and these firms may need to prepare for it, the growth potential from the US IPO market and China’s economic growth forecasts will keep these Chinese firms from backing down.