Chinese Tech Startups Face Long Lineup for IPOs

Credit: CFP

BEIJING, January 16 (TMTPOST) –“The company is now at a critical moment in the process for an initial public offering (IPO) on the Science and Technology Innovation Board (STAR Market) of the Shanghai Stock Exchange). After three years of waiting, if the IPO fails, we are doomed,” Wu Jiangfeng (a pseudonym), an employee of a domestic hard-tech company, told TMTPost.

The hard-tech company where Wu works has been “queuing” in a long lineup for the IPO for more than 1,000 days. One of the reasons why it can't be listed is that there are still problems about its relationship with its related parties.

In the past three years, due to the prolonged IPO process, the company was forced to delay paying year-end bonus, lay off workers for multiple rounds and scale back business. Moreover, the company's overvaluation has made it impossible to refinance, and investors are eager to exit. As of now, the company has not yet completed the IPO, and the specific date of listing is unknown.

The Unyielding Struggle for Listings

Whispers of financial doom circulate among employees including Wu. With over 1,000 days in the IPO lineup for the Shanghai Stock Exchange, these companies are shadowed by the specter of company closure if the elusive listing doesn't materialize soon.

It is not an isolated case, as data from China’s three stock exchanges reveals a grim reality. As of December 31, 2023, there were a staggering 534 Chinese A-share IPO hopefuls, with over 50% facing termination due to factors like financial report delays. In 2023 alone, 286 companies terminated their IPO plans. In the same period, only 313 domestic companies were listed, down from 424 in 2022. It represented a 26.18% fall year on year, indicative of the challenge of navigating the increasingly stringent IPO approval process.

As of January 14, 2024, approximately 514 companies find themselves in the A-share IPO queue, grappling with uncertainty. This waiting game has prompted many venture capitalists (VCs) to adopt a cautious stance, shifting their focus away from hard tech investments and adopting a “wait and see” approach.

The regulatory authorities, notably the China Securities Regulatory Commission (CSRC), have acknowledged the tightening of IPO regulations. “The market has sensed a noticeable decline in monthly approvals and initial issuances from September to December of the previous year. Looking ahead, the CSRC and the exchange will persist in tightening the IPO entry, enhancing the quality of listed companies right from the beginning, implementing effective counter-cyclical adjustments, and fostering a more harmonized and balanced development between the primary and secondary markets,” said Yan Bojin, Director of Issuance Department of CSRC.

Beyond the sheer number of companies in the line, the prolonged IPO process has become a hallmark of the market now. Companies in the IPO pipeline face an arduous journey that extends over a year, a reality reflected in the average processing time. For instance, firms eyeing the STAR Market experience an average duration of 397 days from application acceptance to listing.

Regarding the Beijing Stock Exchange, the average duration from the acceptance of IPO applications to actual listing is as long as 265 days. In this duration, the time taken from the acceptance to the preliminary review averages 178 days, from preliminary review approval to submitting registration averages 17 days, from submitting registration to successful registration averages 18 days, and from successful registration to actual listing averages 52 days.

The Tumultuous Path of Post-IPO Companies

However, even for those that overcame the hurdles and got listed on stock exchanges, the post-IPO scenario is far from ideal. Stocks prices valuations plummet, and investors received disappointing returns. Keep (03650.HK), touted as “China’s first stock of sports technology”, witnessed a gradual decline in stock prices after its Hong Kong listing, leaving investors disillusioned.

Keep is not alone. Many companies, once publicly listed, find their stock prices below the valuation in their last private funding round. Investors face uncertainties, with stock prices plummeting and the prospect of returns dwindling. This scenario raises questions about the viability of the “value investment philosophy” that was once championed.

In February 2023, Hesai Technology, known as “China’s first LiDAR stock”, went public on Nasdaq. On the first day of trading, the stock closed at $21.05 per share, up 10.79% from the issue price, implying a market capitalization of $2.621 billion. However, within the first 12 trading days, the share price continued to drop. As of January 15, 2024, its stock price fell to $7.71 per share, resulting in a market capitalization of only $968 million, representing a significant 63% decrease from the initial market capitalization on the IPO day.

“In the past couple of years, we find the main concern is that the secondary market has experienced a significant decline. Many funds have allocations for both primary and secondary markets. The proportion of the secondary market has dropped considerably, while the proportion of the primary market has correspondingly risen too high. Therefore, the misalignment between the primary and secondary markets is severe,” said Zhu Xiaohu, a Managing Partner at GSR Ventures, comments in recent public.

The global primary market is equally complex. Even in the U.S., where IPOs traditionally witnessed a rebound, the performance has been lackluster. As of December 31, 2023, the U.S. market welcomed only 162 new listings, with a significant drop in both the number and scale compared to 2019.

The challenges in the IPO market are reverberating through the venture capital sector, with VC firms reassessing their strategies. Investments in hard tech fields like AI and chip manufacturing are flowing to early-stage, small, and niche projects.

A Rebound in Market by as Early as 2025

In response to the turbulent market conditions, Chinese authorities are taking steps to bolster the economy and foster high-quality development. Initiatives like those launched in Shanghai aim to breathe life back into the equity investment industry. The measures focus on optimizing services for equity investment institutions, guiding investments towards early-stage tech ventures, and supporting risk capital development.

Shanghai’s commitment to nurturing the growth of secondary market funds signals a proactive approach to provide an avenue for these funds to flow back into the market. The city’s endeavors align with a broader national effort to stabilize the market, allowing it to function amid IPO freezes and financial uncertainties.

Despite the prevailing challenges and a cautious market outlook, industry leaders express optimism for the future. The expected market rebound, projected around 2025, provides a glimmer of hope. The policies aimed at invigorating the market indicate a concerted effort to address the systemic issues plaguing the IPO process.

Li Jiaqing, the President of Legend Capital, emphasized the importance of adopting a long-term and persistent approach in the investment industry. He highlighted the need to navigate through short-term fluctuations, and gains and losses by extending the time perspective. Li expressed confidence that the past few years have served as a valuable incubation period, and there might be a new wave in the industry around 2027 or 2028. He advised not to overly concern themselves with short-term market movements, stressing the significance of adopting a long-term view, and moving forward with resilience.

“Looking to 2024, I hope entrepreneurs will restore their confidence, which is very important,” said He Zhiqiang, the Senior Vice President of Lenovo Group and President of Lenovo Capital.