New York set for first Chinese IPO in seven months
New York is poised to see its first initial public offering by a Chinese company in seven months amid signs the city could see a new flurry of such listings.
Healthcare supplies maker Meihua International Medical Technologies is on track this week to price its debut share sale, which would raise up to $57.5 million, according to the New York Stock Exchange’s online IPO hub. New U.S. stocks usually start to trade a day after pricing.
Meihua could have company. Eight Chinese companies have filed initial public registration statements, called F-1s, with the U.S. Securities and Exchange Commission in the six weeks since Dec. 30. That matches the number of Chinese F-1s filed for the six-month period through Dec. 29.
Fifteen other Chinese companies that registered previously, such as Meihua, have filed updated registration statements since Dec. 30, though some of these are for secondary share sales.
A series of announcements from regulators in Beijing and Washington helped set the stage for the rush of filings by clearing up some of the uncertainty that had brought Chinese listings in the U.S. to a virtual halt since Didi Global’s disastrous $4.4 billion IPO last June.
“There are regulatory efforts on both sides of the Pacific that are working towards building a regulatory framework where there is some backstop and transparency,” said William Rosenstadt, founder of New York law firm Ortoli Rosenstadt and an adviser to a number of current IPO candidates.
Since early July, only LianBio, a biopharmaceutical drug developer with most of its operations in China but headquartered in New Jersey and considered a Cayman Islands company by the SEC, has managed to complete listing in the U.S., according data compiled by information service Dealogic.
On Dec. 24, the China Securities Regulatory Commission unveiled draft rules that would require companies to get permission to list overseas.
The companies that have filed with the SEC since then say they believe the new rules do not apply since they have not yet been finalized. This may hint at a race to list before the CSRC puts the new requirements into formal effect.
Notably, the eight new filers and most of those which have updated their prospectuses are seeking to raise no more than Meihua, and as little as $1 million — peanuts compared to deals like Didi‘s IPO.
Amid a rush capped off by that ill-fated offering, 53 Chinese companies raised a total of $15.1 billion through U.S. IPOs last year, or an average of $285 million per sale, according to corporate advisory Kroll.
This was more offerings than ever seen in one year, even with the drought after Didi, and the highest sum raised since 2014. However, shares of the companies that listed last year were trading 53% below their IPO price on average as of Jan. 21, according to investment research company Renaissance Capital.
If the IPOs of Meihua and other pending issuers go well, that could help to restore confidence, some market players say.
“It is very much a litmus test, the first few, how they do,” said David Williams of Williams Capital Advisors in Palo Alto, California. “If the first few IPOs trade down on opening day, then the window is going to shut again.”
These offerings should also provide more clarity as to regulators’ stance. “The tip of the spear is going to be the smaller cap lower-risk issuers,” said Rosenstadt.
Others believe bigger Chinese companies will remain on the sidelines, even if the small Chinese IPOs go well.
In the wake of Didi’s punishment and its December announcement that it will delist from New York, Marcia Ellis, a partner at U.S. law firm Morrison & Foerster in Hong Kong, said she expects larger companies to wait for clarity from the CSRC about its new offshore IPO registration system.
Of particular interest is how the final CSRC rules treat “variable interest entities,” the corporate structure that companies such as Alibaba Group Holding have used to sell shares abroad even though the sectors in which they operate in China may have been barred to foreign investors.
The trick has been that the corporate entity selling stock did not actually own the operating units in China, but only shares their revenues and profits through contractual arrangements. Beijing publicly paid little notice to VIEs until last fall, but the CSRC’s draft rules explicitly leave open the possibility of offshore IPOs involving the structure.
Four days before the CSRC put out its draft, the SEC issued new guidance to Chinese listing hopefuls on the VIE-related disclosures it wants to see in their prospectuses after months of privately pushing demands on listing applicants.
Meihua does not have a VIE, but six of the eight new F-1 filers do use the structure. A key test will be whether the SEC blesses any of them to list.
“They are not yet giving us the green light,” said a lawyer in Hong Kong who has been advising private equity groups looking to list larger investee companies with VIEs in the U.S. “For that part, there is not much clarity yet.”
The lawyer added that in the past, the SEC would likely have been satisfied as long as an IPO prospectus noted risks related to Chinese draft regulations. But the Didi debacle has made Washington warier.
Another Beijing regulator, the Cyberspace Administration of China (CAC), has already drawn a clearer line, declaring that from Tuesday, companies with data on more than 1 million users must undergo a security review before listing offshore.
This Didi-linked rule has killed off the U.S. listing hopes of many Chinese online services companies for now. Neither Meihua nor most of the other recent filers appear close to the 1 million threshold.
However, Henguang Holding, a national insurance agency which applied to list on Jan. 18, could draw scrutiny.
“We believe we may not be subject to the cybersecurity review by the CAC for this offering,” it said before explaining: “We presently maintain and process all of our personal information data in the PRC. Data processed in our business is less likely to have a bearing on national security.”
Another issue for Chinese companies is a U.S. law that could force them to delist if their audit records cannot be reviewed by Washington regulators for three consecutive years. A bill passed by the U.S. House of Representatives last month would shorten the timeline to two years, potentially setting the stage for forced delistings next year.
Meihua and its small peers say that their auditors are based in the U.S. and fully subject to regulatory inspections. But Ellis questions whether these companies’ units in China would really be able to deliver audit records for U.S. inspection given Beijing’s ban on sharing such information.
Still, the U.S. remains the favored destination for many Chinese companies because of high valuations and liquidity in New York, according to market players. Some add that many of the small companies now seeking U.S. IPOs might not able to list in Hong Kong under recently tightened rules there.
And while the S&P 500 has risen 12.3% over the past year, the Hang Seng Index has fallen 17.5%, underlining diminishing Hong Kong valuations versus the U.S.
“We expect the gap to widen,” said Ricky Lee, Kroll’s managing director of valuation advisory services in Hong Kong.
Author: ZACH COLEMAN, NIKKEI Asia