It appears many Chinese tech executives had the same new years resolution for 2020: Do more fundraising.
Barely a couple weeks into the new decade, quite a few of China’s most prominent tech titans are heading to global capital markets looking for funding. Huawei is reportedly seeking to raise up to $2 billion in loans and bond sales. JD has filed to raise $1 billion in a bond issuance while also planning IPOs for both its JD logistics and JD Dada arms in the US. Fast-growing Luckin Coffee has also already filed to raise funds through both a $400 million bond issuance and a secondary share offering of $378 million. Additionally, US-listed Baidashu, Netease, and CTrip are all reportedly considering secondary listings in Hong Kong.
What’s driving this all-at-once cash grab? It turns out that the new year brings with it a perfect storm of converging factors that draw firms to the capital trough. And for a community of tech entrepreneurs who have struggled to secure financing in 2019’s “capital winter,” which saw a total deal value fall to $51 billion from $112 billion the previous year, there is hope that the worst could be over.
Window of opportunity
Shares in China’s major publicly-listed tech firms have surged in recent months, renewing the interest of investors. For many of these companies, this means share prices rebounding from a tumultuous past few years. Netease has returned to heights not reached since late 2017. Tencent’s shares are pricier than at any point since mid-2018. Xiaomi’s long-suffering shareholders, who saw the stock move consistently downward since the company’s much-hyped July 2018 IPO, have been rewarded by a rise of roughly 30 percent over the span of two months.
Renewed investor confidence has led many firms to wonder if the current moment offers a rare window of opportunity. “With share prices so high, it could be a good time to add to their war chest,” explains Jimmy Lai, former CFO of US-listed China Online Education Group and a current board member for three NYSE-listed firms. “There is a fear of missing out that may come into effect, as well as a herd mentality. No one wants to miss their window, and when their competitors are raising cash as well, nobody wants to be the company that doesn’t.”
The Hong Kong secondary listing
On Nov. 26, US-listed Alibaba issued a secondary listing on Hong Kong’s stock exchange, raising over $11 billion, the largest listing on any exchange for all of 2019 save for that of Saudi Arabia’s state oil giant Saudi Aramco. In the big picture, the Hong Kong listing gave one of China’s largest and most strategically important tech firms a hedge against the possibility of proposed US regulations which would demand further disclosure from Chinese firms listed in the US, or perhaps even ban and delist them altogether. Alibaba’s blockbuster offering also provided a much-needed economic and morale boost to a financial center that had been rocked by protests, violence, and political conflict for much of the year.
Yet for Netease, Baidu, CTrip, and other US-listed firms considering following in Alibaba’s footsteps with a secondary listing in Hong Kong, the incentive to do so may not be anything more complicated than access to cold, hard cash. “Hong Kong investors behave differently than those in the US. The US stock markets are dominated by institutional investors, while Hong Kong has a larger percentage of retail investors. Being listed in both places provides more flexibility for firms when looking to raise further capital,” explains Jimmy Lai. “Now that Alibaba has done it successfully, some of these other firms are willing to give it a try.”
Indeed, the impact of Alibaba’s Hong Kong listing seems to be part of what is fueling the overall bullishness for Chinese tech stocks. As of Jan. 14, shares of Alibaba’s US-listed shares have risen roughly 15 percent since their Hong Kong IPO date of Nov. 26, a date that seems to serve as the point of lift-off for the current share price surges of Tencent, JD, Netease, Xiaomi, and others.
(Relatively) calm geopolitical waters
The feud between the US and China appears to be amidst a slight respite. A substantive—if limited—trade deal has now been signed and Trump’s provocative tweets and unpredictable behavior do not seem to rattle markets in the same way that they once did. While this is far from a return to normalcy, fears of trade war-induced economic Armageddon appear to have subsided, at least for the time being. And when fear subsides, it’s often good for markets.
Currency balancing act
Those inclined to hold a more bearish view of the Chinese economy altogether see Chinese firms’ efforts to tap international capital markets as one downstream effect of China’s central bank and financial regulators’ attempts to manage the country’s foreign currency reserves. Despite being a net exporter, the world’s second-largest economy is heavily dependent on imports for some of its most essential goods, including oil, metals, and agricultural products. As China must pay for such goods using foreign currency, this requires not only that they have a large stockpile of foreign currency reserves, but that those reserves be liquid enough to use.
As China’s leaders have been simultaneously managing a slowing and heavily-leveraged economy, trade tensions with the US, and their own global ambitions, ensuring healthy levels of liquid foreign currency has become an increasingly complicated task. In recent years, the People’s Bank of China has taken steps to limit capital outflows and restrict conversion from RMB to USD. While a large state-run oil company or agricultural goods importer may be able to convert freely, private firms, and individuals often face more obstacles.
As Fulbright University Vietnam professor and well-known critic of China’s financial system Christopher Balding puts it, “They’ve effectively started rationing US dollars.” For China’s technology firms, many of whom require foreign currency for their overseas expansion plans, getting that currency through international capital markets may be easier than converting their RMB-denominated assets into USD. Says Balding, “by raising money from outside China, it is a win-win for both the party elite in Beijing and for the tech companies as well. The companies get cash to fuel their expansion plans, and Beijing can see their firms expand globally without having to give them dollars to do so.”
Is capital winter over?
For the likes of Alibaba, Huawei, JD, and Netease, this may be an opportune time to raise funds on preferable terms. Yet for firms that have struggled lately, investors’ recent enthusiasm opens a door for a much-needed lifeline.
High-profile EV-maker Nio has struggled to stay solvent since its 2018 IPO and has seen its share price fall accordingly, yet a better-than expected quarterly earnings report and strong financial market tailwinds appear to be pushing them closer to another funding round. For viral media platform Qutoutiao, their resurgent share price could potentially allow them to do the same.
Yet for startups, who endured a difficult 2019 as capital winter went into full swing, it is unclear if the gains we are currently seeing will trickle down to them. A thaw seems to be underway, but only time will tell if it is a true sign of spring.