Top Chinese Tech IPOs to watch in 2021
By Erik Wernberg-Tougaard
Are you wondering which Chinese companies are planning to IPO in 2021? More and more investors have Chinese securities in their portfolios. This blogpost takes a closer look at what we believe to be the most interesting Chinese companies planning to IPO in 2021.
The Chinese stock market has historically been one of the most difficult in the world to invest in due to the unpredictive nature and interference from the Chinese government. But over the last decade, things have improved dramatically, and now Western investors – private as well as institutional - are increasingly looking to the opportunities China provides. This is not surprising, as there are huge opportunities present for foreign investors, who dare to take on the challenge of pursuing returns in the country, which recent published five-year plan indicates huge opportunities for green and tech companies / stocks.
The Chinese tech giants are already listed overseas
More than 200 Chinese companies are listed on the New York Stock Exchange as of 2020, the majority of which are listed as American depositary receipts (ADR’s). Some of the most well-known companies listed are the tech giants Alibaba, Baidu and JD.com, but other major companies include the electric vehicle manufacturer Nio, the online entertainment company, Bilibili, and the ecommerce platform Pinduoduo. Some of these companies like Jd.com and NetEase have also gone through dual listings, in U.S. and Hong Kong, amid tighter scrutiny and regulation overseas and a cooling of the tech regulations in China. The latest example of this is the “Google” of China, Baidu, that listed in Hong Kong in late March.
Several in the top 10
In 2020 alone, no less than 29 Chinese companies IPO’ed on the US exchanges, exemplifying how Chinese companies are quickly gaining ground (and capital) on the international stage. In fact, of the top 10 IPO’s in the third quarter of 2020, three were Chinese companies (namely: Xpeng, EV manufacturer; Li Auto, EV manufacturer; KE Holdings, housing transaction platform). The top four sectors for Chinese IPO’s by gross proceeds were Tech Services, Electronic Tech, Finance, and HealthTech. There is thus a clear trend of technology as a core theme amongst the stocks listed.
A fair share of the companies mentioned above have experienced impressive growth rates over the last couple of years, and many of them are central to the Chinese government’s goals for China’s future development, whether that relates to demography, sustainability or health care. Traditionally such companies have received beneficial treatment such as favourable access to the Chinese market, subsidies, favourable loans and/or research and development support and are therefore often said to be “too big to fail”. Following these companies closely, may give insight into the direction of the Chinese market.
Five interesting Chinese IPO’s to watch in 2021
2020 saw a number of Chinese IPO’s, but there are many more to come. Here are some of the most interesting tech companies expected to IPO in 2021. These include some of China's biggest unicorns, such as ByteDance (owner of Tiktok) and Didi Chuxing (The Uber of China), as well as some interesting companies in AI (artificial intelligence).
1. Megvii
Megvii is one of China’s largest facial-recognition companies and is planning to list on Shanghai’s Stock Exchange's STAR board. It is the company behind the world’s largest open-source computer vision platform, Face++ (pronounced ”Face Plus Plus”) and has more than 2 billion people’s unique facial features in its database. Together with SenseTime, Yitu and CloudWalk it is referred to as China’s ”four AI dragons” and it provides its technologies to the Chinese government and enterprises such as Alibaba, Lenovo and Huawei.
Megvii is an important company supporting China's ambitions to develop an home-grown AI tech industry and could become key in reducing Chinese companies' reliance on American technology. Megvii is also on China’s national AI team, and therefore is likely to receive some benefits in relation to that. It is important to note that the company was put on the US entity list in 2019, due to worries that it took part in mass surveillance of Muslim minorities in Xinjiang.
2. Douyin
Bytedance – the company behind Tiktok, known as Douyin in China – was founded in 2012 by the Chinese internet entrepreneur Zhang Yiming, and since then the company has been one of the fastest growing companies in the world. According to the Hurun Global Unicorn Index 2020, Bytedance was the second largest unicorn in the world with a valuation of 80 billion USD, and its popular video-sharing app has been downloaded more than 2 billion times globally as of today.
Megvii is an important company supporting China's ambitions to develop an home-grown AI tech industry and could become key in reducing Chinese companies' reliance on American technology. Megvii is also on China’s national AI team, and therefore is likely to receive some benefits in relation to that. It is important to note that the company was put on the US entity list in 2019, due to worries that it took part in mass surveillance of Muslim minorities in Xinjiang.
3. Didi Chuxing
Didi Chuxing – the Chinese equivalent to Uber –– is preparing to IPO in 2021, and the company is targeting a valuation above $62 billion at launch. While the official date has not yet been announced, Didi Chuxing is expected to go public sometime in 2021. Didi has more than 550 million users, by far dwarfing Uber’s 75 million users, and operates across Asia, Australia and Latin America. In addition to its carpooling business, the company also has shuttle bus services, bike-sharing, designated driving, auto after-service, delivery and logistics.
But Didi Chuxing has also been criticised for being a cash-burner and did not make a profit in its first six years. That changed in 2020, however, where it made a profit of 1 billion USD for the first time. And now the company’s CEO, Cheng Wei, has said that the Didi Chuxing will "go all out to take the first place in the market.".
4. Sensetime
According to Bloomberg, the AI Unicorn SenseTime is planning to do a dual listing in Hong Kong and Mainland China later this year. Sensetime is also one of the companies on the national AI team tasked with the area of smart vision, and is collaborating with 127 cities across China to use cameras that can analyse anything from traffic to residential security. And it has – like many other AI unicorns – also been given government contracts to help build smart cities across China.
The start-up is now returning to its original plans for an IPO that had been put aside due to the covid-19 pandemic combined with the U.S. blacklisting of the company. This has threatened to reduce its access to American technology, which is crucial for the company. However, the IPO plans are preliminary and subject to change, according to Bloomberg.
5. Hellobike
According to Bloomberg, the Chinese bike-sharing giant Hellobike, has filed for an IPO in US later this year and seeks to raise 1 billion USD, though the exact size is still being discussed. Hellobike is backed by Ant Group and is a mobility service platform with base in Shanghai. It originally started as a bike-sharing company but expanded its services to e-bikes and e-scooters and has 400 million registered users. As Shanghai is in many ways a green frontrunner in China, the company has a large potential to grow domestically.
A regulatory environment with Chinese characteristics
Despite the huge growth opportunities provided by the Chinese market, the market also has a number of pitfalls that investors should beware of as the Chinese stock market is still high-risk.
Even though Chinese companies such as Alibaba, Tencent, Baidu and other larger companies share similarities with the major global tech companies we know in the West, there are some clear differences.
Different standards
Chinese companies tend to report financial statements in a different and less transparent way that makes it harder to do due diligence on the companies for investors. This is not necessarily a bad thing, but it can be a cover for fraudulent or inflated financial statements, and this should be acknowledged. And example of this is Luckin Coffee, which stock plummeted after it was found that it had inflated its sales numbers.
Chinese authorities has the final say
Investors should never underestimate the power of the political environment to influence the stock markets. The best and most recent example of this, is Ant Group’s now cancelled IPO, which was expected to be the largest IPO ever, but was shut down by the Chinese government after Jack Ma, the founder of Alibaba, held a speech in which he criticised China’s financial authorities. Jack Ma disappeared for three months following the speech. Following this, the financial authorities have been looking into a comprehensive overhaul of the regulatory environment in China, which is having large consequences for especially the tech companies and ultimately investors.
There is thus no doubt that prior to investing in Chinese companies, a clear understanding of the market and political dynamics should be high on the agenda. And the message from the Party is clear: China’s authorities has the final word.
Disclaimer: This blogpost is for informational purposes only and should not be relied upon as a basis for investment decisions. All statements made regarding companies or securities are neither endorsements nor suggestions to buy, hold or sell any of the securities mentioned. The writer(s) of this blogpost may maintain positions in the securities discussed in the article.