Two-Tier IPO Market for Chinese Startups - Analysis

Diverging Fortunes in the American IPO Landscape

The initial public offering (IPO) market in the United States presents a contrasting picture for different companies. While some private entities are experiencing strong demand, others are facing unexpectedly tepid interest. This disparity between these two groups is becoming increasingly apparent.

Didi's IPO and Initial Concerns

Initial assessments of the IPO price range set by Didi, the Chinese ride-hailing company, raised questions regarding its valuation. A comparison with similar American companies suggested that Didi’s shares were potentially undervalued within the proposed range.

Ultimately, Didi proceeded with its initial pricing expectations, offering shares at $14 apiece – the high end of the range, but without exceeding it.

Recent IPO Performance of Chinese Companies

This week also witnessed a disappointing launch for DingDong, a Chinese grocery-delivery service. The company reduced its intended IPO proceeds, yet still experienced a flat debut on the American stock exchange.

Missfresh, another China-based online grocery delivery service that recently went public on a domestic exchange, is currently performing even less favorably.

Questioning the U.S. Market for Chinese IPOs

Considering these results, it becomes difficult to maintain a positive outlook on U.S.-listed IPOs. The question arises: why would a company choose to go public in the United States if it anticipates being underpriced and subsequently experiencing poor trading performance?

The answer lies in the contrasting experiences of Chinese and domestic companies. While many Chinese companies appear to be struggling to generate the expected demand for their shares on American exchanges, domestic companies are observing different outcomes.

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It’s important to note that our focus is on technology companies. The Exchange does not monitor IPO results for companies involved in commodity extraction or biotechnology research. A focused approach is necessary given the breadth of the market.

Contrasting Trends: Domestic vs. International Tech IPOs

There are exceptions to this general trend. The recent increase in Nio’s share price could be cited as one. However, a comparison of recent IPO news from SentinelOne and Xometry with the performance of Chinese tech companies entering the American public markets reveals a distinct divergence.

A clear gap appears to be forming between the two groups.

Fluctuating Market Reception

Didi’s initial public offering was priced at $14 per share, establishing a company valuation of approximately $67 billion based on a nondiluted calculation. This figure could reach $70 billion when considering a broader share count for market capitalization purposes. Considering the company’s $6.5 billion in total revenue for the first quarter of 2021, coupled with positive net income, Didi is currently trading at a significant discount compared to Uber’s valuation multiples.

Specifically, Uber’s trailing price-to-sales ratio exceeds 8x. Applying this same valuation metric to Didi’s revenue over the past twelve months would result in an estimated value of nearly $179 billion. However, this is not the current market assessment, and this discrepancy is a key point to emphasize.

Recent underperformance of several Chinese tech IPOs listed in the United States contrasts sharply with the positive reception of domestic IPOs this week, including:

• Xometry’s IPO was priced above the initial range; detailed financial coverage can be found on TechCrunch.
• SentinelOne also priced its IPO above a raised range; TechCrunch provides coverage of its financials and pricing details.
• LegalZoom successfully priced its IPO above the projected range, as reported here.
• Integral Ad Science similarly priced its IPO above the initial range, with further information available here.

These results demonstrate a clear trend.

While a wave of favorable outcomes has characterized technology IPOs across various sectors, Didi’s public offering, representing one of China’s most prominent technology firms, has generated limited investor enthusiasm. Although a strong trading performance today is possible, it seems unlikely that the company will fully close the valuation gap with Uber, even when accounting for potential inherent advantages in Uber’s business model.

What factors are contributing to this situation? We initially explored potential reasons when Didi’s IPO price range was first announced. Let's revisit those considerations.

Concerns are justifiable given the increasing scrutiny of tech companies by the Chinese Communist Party – a single-party government led by a single leader. Recent reports suggest a tightening regulatory environment.

While the United States Congress debates the regulation of domestic tech giants, developments in China, as highlighted in recent headlines (listed in reverse chronological order), are noteworthy:

• Bloomberg reported in March 2021 that Xi Jinping cautioned against tech excesses, signaling a broadening crackdown.
• Verdict published an article in April 2021 detailing Beijing’s efforts to exert greater control over China’s tech titans.
• The Wall Street Journal, in June 2021, discussed China’s new strategy to gain more control over the vast data holdings of tech companies.

These developments paint a clear picture. Is this a market where investors want to commit their capital? While some venture capitalists believe so, American investors appear hesitant, and this factor is difficult to dismiss entirely. The fraud case involving Luckin Coffee provides another reason for investor caution, though this story has faded from public discourse more quickly than the WeWork collapse, despite being a more severe incident.

Therefore, as American companies conclude the second quarter, it’s a remarkably positive period for domestic technology IPOs. However, for certain foreign companies, the celebratory atmosphere appears to be absent.