Recently, the most discussed topic in the capital market has been Xiaomi's listing in Hong Kong. Especially when its valuation dropped from $100 billion to $54 billion, people were even more shocked, discussing why Lei Jun would still take Xiaomi public when its valuation was halved? Besides Xiaomi, numerous unicorns such as Douyu, Inke, and Tongcheng-Elong have also announced plans for Hong Kong listings. Why are they crowding to go public at this specific time?
Years from now, when we look back at the history of Chinese internet business, we will certainly regard June 2018 as a key historical node. To date, such historical nodes have only appeared three times:
The first time was in 2000, when the first batch of Chinese PC internet companies went public in a concentrated manner. Unicorns of that era, such as Baidu, Tencent, Shanda, Sohu, and NetEase, completed the first harvest of the internet dividends of that time;
The second time was around 2010, when Youku, Dangdang, Qihoo 360, Renren, Kaixin001, Xunlei, 21Vianet, and others set off a new wave of overseas listings;
The third time is June 2018, when the capital market saw frequent major news: Ant Financial raised $14 billion, and newly listed Foxconn Industrial Internet and CATL became the most dazzling tech stocks. Subsequently, unicorns like Xiaomi and Meituan will successively go public overseas. This is just the beginning; there are dozens of other unicorns in line for overseas listings, including Uxin, Inke, Tongcheng-Elong, Ping An Good Doctor, Liepin, Duoyi Network, FingerTip, Babytree, FangDD, Sunlands, Pinduoduo, and Yiguo.
Unicorns are actively seeking overseas listings with a density that is truly rare. What is the capital logic behind this?
The Window Period of the Hong Kong Stock Market
The Hong Kong stock market is ushering in a "golden age" after a decade. The Hang Seng Index rose by more than 30% in 2017, becoming the best-performing major index globally that year. In January 2018, the Hang Seng Index successfully hit a record high of 33,484 points, breaking the previous historical high set in 2008.
Currently, the Hong Kong stock market is at a high level, especially with the high valuations of new economy stocks. Choosing to list and raise funds at this time allows for more capital in exchange for less equity dilution.
The Hong Kong stock market has been in a relatively subtle high-level volatile adjustment period in recent months. On June 19, both the Shanghai Composite Index and the Hang Seng Index fell sharply. The Hang Seng Index once plummeted by nearly 1,000 points, falling below 29,500 points. Opinions vary on whether the Hong Kong stock market will rise or fall subsequently. Once the Hong Kong stock market continues to fall or turns from a bull to a bear market, it will have a significant impact on the valuations of unicorns.
Boosted by New Hong Kong Stock Policies
At the end of 2017, driven by Charles Li, Chief Executive of HKEX, the Hong Kong Stock Exchange introduced the biggest reform in its 25-year history: allowing companies with "weighted voting rights" to list, allowing biotech companies without revenue to list, etc.
Charles Li once described the Hong Kong stock market as "free love"—in terms of the system, among the three stock markets, the listing system design of the Hong Kong stock market has become increasingly close to NASDAQ, both adopting a disclosure-based system.
In terms of IPO approval rate, in 2017, a total of 310 companies applied for IPOs in Hong Kong, and only 8 were rejected. At the same time, the Hong Kong IPO review speed is fast, and it takes an average of only 120 days for a company from submitting its listing application form to receiving a decision.
Regarding valuation, among the three, the A-share market offers the highest valuation, but its threshold is also the highest, while the US and Hong Kong stock markets are more internationalized, and Hong Kong has unique advantages—when it comes to the understanding of Chinese companies by investors in the two places, Hong Kong certainly understands them better.
Two "Super Variables" in the External Business Environment
Why are a large number of "unicorn" companies crowding to list overseas recently, even at the cost of "bleeding listings"? The root cause is that two "super variables" have appeared in the external business environment:
First, the "traffic dividend" of the mobile internet has peaked, and it is difficult to have higher-than-expected high growth. And this round of "unicorn" companies crowding to go public overseas are almost all developed based on the mobile internet, and many have not yet achieved sustained profitability. The US and Hong Kong capital markets are relatively friendly to these companies, with no rigid requirements for profitability, and can help founders strengthen their control over the company through relatively flexible AB share systems.
Second, after the issuance of the "Guiding Opinions on Regulating the Asset Management Business of Financial Institutions," the financing environment faced by entrepreneurs has gradually become severe. Imagine that before many "unicorn" companies go public, they can obtain a relatively high valuation (over $1 billion) after bargaining with a few institutional investors. Why? In addition to the intrinsic value of the enterprise itself, it is also crucial that the "primary market" investors themselves are relatively "wealthy." The main source of funds for the "primary market" is ultimately the banking system, and this is exactly an important part that the new regulatory rules require to be tightened. "Primary market" investors are not as wealthy as they used to be, which will inevitably impact the valuation level of "unicorn" companies.
A study by the National Bureau of Economic Research concluded that, on average, the valuation of "unicorns" is overestimated by about 50%. This situation is common globally. Attracting venture capital or going public, the final result is of course "financing," but "financing" is often not the ultimate goal.
The listing breakthrough of "unicorn" companies is just an important part of a complex "target system," or just leaving a mark in the space-time "coordinate system" of enterprise development. From X-round venture capital to the final listing, it is a process of "unicorn" companies integrating into a broader business system. Venture capital, the capital market, and what traditional banks provide are far from just money; they shape a business ecosystem. Entrepreneurship and innovation can be seen as the Amazon rainforest ecosystem, and capital is like the crisscrossing rivers in this ecological network, nurturing the elements of the ecosystem and promoting the rapid evolution of the entire ecosystem.
