The shabby state of the market for tech stocks in Hong Kong has caused Chinese podcasting platform Ximalaya to push back plans for an initial public offering yet again.
Ximalaya, which is backed by a roster of tech heavyweights including Tencent Holdings ( (TCTZF) and HK:0700) and Baidu ( (BIDU) and HK:9888), received a frosty reception from investors, according to both the Financial Times and Bloomberg. That's even though it had downsized its stock offering to between US$50 million and US$100 million and already has raised far more than that amount privately.
Shanghai-based Ximalaya last September pulled plans for an American IPO under pressure from Beijing. It was dissuaded after seeing the Chinese government's assault on fellow tech platform DiDi Global (DIDI) , which listed on the New York Stock Exchange last year only to run afoul of Chinese rules on how customer data is stored. DiDi, which says it will delist from the NYSE, has seen its shares fall 78% since its debut.
Ximalaya, named by co-founder and CEO Yu Jianjun for the Himalayan mountain range, has been talking with prospective cornerstone investors. In Hong Kong, such big institutional investors commit to purchase a set amount of shares immediately prior to a public listing as a means of support.
Ximalaya already has raised nearly US$704 million in venture capital money, according to Crunchbase. Besides Tencent, which has its own music streaming service, and Internet browser operator Baidu, Ximalaya has found money in previous venture capital rounds from mobile phone maker Xiaomi ( (XIACY) and HK:1810), Sony ( (SONY) and T:6758) and Goldman Sachs (GS) . The last round, in 2018, valued the company at US$4 billion.
Ximalaya filed reference documents on March 22 with an eye on an IPO in Hong Kong. The details of any listing - in fact, even the word "listing" itself - were redacted as you'll see here as it worked on finalizing the offer documents. It is planning to list under new rules in Hong Kong allowing unequal voting rights, with each Class B share having the voting power of 10 Class A shares. That would leave CEO Yu with voting control.Ximalaya had 267.9 million monthly active users as of last year, one-fifth of the Chinese population, both through its own mobile app and third-party devices such as smart speakers. Government stats show it made up 28% of all online audio revenue in China. Revenue for 2021 stood at C¥5.9 billion (US$874 million), up 44% over the previous year. But it is running at a loss, posting C¥5.1 billion (US$762 million) in red ink, thanks to payments to contributors, research-and-development costs and marketing expenses.
Those user numbers notwithstanding, Ximalaya's offering was going to be undersubscribed, according to the Financial Times, citing bankers and early-stage investors. That reaction to the IPO indicates the concern many still have over Beijing's dim view of data-driven tech companies that sell even a sliver of themselves into public hands.
The specter of DiDi
Ximalaya originally had been looking for a much larger, US$500 million offering on Wall Street. But Chinese regulators suggested that it think again, with the painful lessons of ride-hailing market leader DiDi Global plain to see. Originally, it was considering switching to an offering even larger than US$500 million in Hong Kong.
DiDi satisfied the pre-existing rules for foreign listings out of China. Obviously, when you prepare an IPO, you have plenty of paperwork to prepare, expensive lawyers and investment bankers to pay, a timeline to keep. There's pressure from existing investors to get the company public and offer a potential exit.
But days after DiDi's debut on June 30, 2021, it was barred from signing new customers and saw its apps banned from Chinese app stores. DiDi failed to heed a "suggestion" that it delay from the previously obscure Office of Cyberspace Review, which was less than a year old at the time. Two other Chinese Internet companies, job site Kanzhun (BZ) and the freight consolidator Full Truck Alliance (YMM) , suffered the same fate. They had broken rules that didn't yet exist about how Chinese companies with reams of user data can list.
The Beijing government is particularly concerned that tech companies leave themselves open to exploitation or forced data exchange if they list outside China. That's because Beijing would force its own access to tech company data inside China and figures foreign investors and governments would do so, too.
Although Beijing has promised to allow future overseas listings, companies such as the medical data company LinkDoc Technology pulled the plug on plans for a U.S. float. Many Chinese tech companies had gone public via a legal maneuver using a Variable Interest Entity, which saw a Cayman Islands company list in the United States that is technically not the Chinese company but has a business contract to derive its proceeds. The viability of VIEs is also in doubt, even though the Chinese stock regulator has explicitly said VIEs aren't illegal. Instead, China introduced new rules in December requiring all companies listing abroad to file for approval with Chinese regulators. The rules also require companies in touchy industries to seek special permission to go public on a market outside China.
Tough market for IPOs
The Cyberspace Administration of China, which sets data and Internet rules, and the country's stock watchdog, the China Securities Regulatory Commission, had both approved Ximalaya for a Hong Kong listing, a state-run investor in the company told the Financial Times.
However, the sorry state of the Hong Kong stock market has made it a torrid time to raise money in a market that previously led the world in new listings. According to Dealogic, the amount raised in new listings in Hong Kong has fallen 94% so far this year compared with the same period last year.
The Hang Seng Tech Index has fallen 41% over the course of the last 12 months. It peaked in February 2021, with a high-to-low trough through this March, by which time it had fallen by two-thirds of its value (65.4%, to be exact).
Paradoxically, Hong Kong and Chinese shares have held up pretty well over the stock turmoil this summer. Hong Kong tech stocks have been on the rise since mid-May, and are approaching their levels set when Russia invaded Ukraine on Feb. 24. Hong Kong stocks in general, in the form of the broad Hang Seng Index, are only 4.7% lower than their pre-invasion levels and down 6.9% so far this year.
The Hong Kong dollar shares the U.S. dollar's strength because the currencies are pegged. But Hong Kong banks have resisted raising interest rates as fast as their U.S. counterparts. Consequently, Hong Kong tech stocks have not fared as badly as their U.S. counterparts, with the Nasdaq down 18.0% since the Ukraine invasion and 29% so far this year.
Backers want an exit ramp
Ximalaya faces pressure to list from some of its venture capital backers, who would like to exit at least part of their positions. But in very poor equity markets, the early investors may struggle to recoup their investment, and the company struggled in pricing negotiations with investors.
Ximalaya hoped to take orders as soon as next week, according to Bloomberg. However, it now will not test the IPO waters until September at the earliest, depending on market conditions, and hasn't set a new timeline. It may also sell part of itself to a Shanghai government entity that then could veto major decisions, which is one way the Chinese Communist Party seeks to increase influence over tech companies.
It will be a bellwether of tech sentiment if the Ximalaya IPO ever gets off the ground. Whether investors in Hong Kong buy into the offering will show whether they believe in China's promise to allow tech companies to list once again. For now, the shadow of DiDi looms over Chinese tech, and the hints of sunshine to come are slight.