Chinese companies are consistently undervalued when they go public. That's clearly the case with the highly sought-after market debut in Hong Kong of short-video app Kuaishou Technology HK:1024.
The company, a competitor to TikTok, saw its shares leap to HK$337 at the open of trading Friday and crest at HK$345, a gain of 200%. The shares fell back slightly from that phenomenal start but still closed at HK$300.
The Beijing-based company raised HK$41.0 billion (US$5.3 billion) with the initial public offering, pricing the top of its range at HK$115. That should rise to HK$47.0 billion (US$6.0 billion) if the overallotment is exercised in full, as seems likely given the high demand.
Retail investors borrowed on margin heavily to put in orders valued at 1,204 times the available public float of shares. Many had freed up money to invest in the initial public offering (IPO) of the Alibaba Group Holding (BABA) spinoff Ant Group, which runs its Alipay digital wallet. That IPO was due to be the largest in world history, but was pulled - word is by the direct intervention of Chinese President Xi Jinping - two days before its US$37 billion listing date in November.
Kuaishou is backed by Tencent Holdings TCEHY, which owns 12.3% of the shares after the offering. The app was launched in 2011 by former Google software developer Su Hua and former Hewlett-Packard software engineer Cheng Yixiao as a way of creating and sharing GIFs. It branched out into short-form video in 2013, and with business booming started live streaming in 2016.
Two years ago, average daily user numbers broke through the 100 million barrier. Between its apps and miniprograms, the company now has around 300 million daily users, generating e-commerce merchandise volume of C¥330 billion (US$46.5 billion) for the first 11 months of last year.
Kuaishou's app is the biggest competitor to TikTok's Chinese version, called Douyin. Friday's share jump gives Kuaishou a market capitalization of US$159 billion. That approaches the latest valuation of TikTok's parent, ByteDance, which last raised venture capital with a round valuing it at US$180 billion. However, ByteDance's valuation would also be sure to leap on its stock listing when retail investors -- notoriously momentum and brand-name driven in China -- get a chance to buy.
ByteDance is also looking at listing some of its operation in Hong Kong. But its plans for an IPO were derailed after it ran into political trouble during the administration of former U.S. President Donald Trump, who sought to ban the app in the United States unless it was sold into U.S. hands.
The Kuaishou IPO was underwritten by Morgan Stanley (MS) , Merrill Lynch (BAC) , China Renaissance Securities, HSBC (HSBC) , ICBC International, Haitong International Securities, BOCI Asia and Futu Securities.
It's encouraging that Kuaishou has been far more forthcoming than normal in its plans for how to use the proceeds. Where other companies say they'll simply use the money for "general corporate purposes" or some such vagueness, Kuaishou said it will use 35% of the proceeds to build out its ecosystem, 30% for research and development and tech spending, 25% for acquisitions or investments, and 10% for working capital and, yes, "general corporate purposes."
Kuaishou has lined up 10 cornerstone investors, a common practice in Hong Kong, where companies get prominent institutions or individuals to commit to buy a block of shares in the book-building phase of the IPO. This cornerstone roster includes fund managers such as Fidelity, BlackRock (BLK) , Invesco and Morgan Stanley, as well as sovereign wealth funds such as GIC from Singapore and ADIA, the Abu Dhabi Investment Authority. The Canada Pension Plan Investment Board has also taken up a chunk.
The cornerstones have agreed to a six-month lockup on the shares, meaning they can start selling and locking in gains as of Aug. 4. That could create downward pressure and a buying opportunity around that time.
The Hong Kong stock market used to be comprised of Asian banks, Hong Kong property developers and industrial companies with factories and sales in China. That has changed significantly since November 2018, when Alibaba conducted a US$12.9 billion secondary offering of its shares in Hong Kong to supplement its New York listing.
Since then, there has been a string of tech-related secondary or primary listings in the city. Online health clinic JD Health International raised US$3.4 billion this November, its shares leaping 56% on debut day. It's a subsidiary of the Alibaba e-commerce competitor JD.com (JD) , which itself is 20% owned by the Chinese videogame maker Tencent Holdings.
Alibaba and Tencent have formed competing business empires, investing in similar industries by taking stakes in competing Chinese companies. But in the past they have required investors to pledge they would not invest in the companies of the "other camp" if they were to get exposure to promising listings in their own stable. Chinese regulators are now considering how to prevent such anticompetitive behavior.
