Weblog with daily updates of the news on a frugal, fair and beautiful China, from the perspective of internet entrepreneur, new media advisor and president of the China Speakers Bureau Fons Tuinstra
China’s leading bubble tea makers including Mixue Bingcheng and Guming, each with thousands of stores, are rushing for an IPO in Hong Kong. A quick move now to collect capital might define the winners of the future, tells business analyst Ben Cavender to Reuters.
Reuters:
Mixue Group and Guming Holdings, China’s largest and second-largest freshly-made bubble tea chains by store count as of 2023, submitted applications for initial public offerings (IPO) in Hong Kong on Tuesday, Hong Kong Stock Exchange filings showed.
Mixue, which has roughly 36,000 stores, is looking to raise $500 million to $1 billion in its Hong Kong IPO, while Guming, with 9,000, is aiming to raise $300 million to $500 million, according to a source with direct knowledge of the matter…
Bubble tea is one of the few bright spots on the consumer front in China, with low-price operators doing particularly well.
According to a China Chain Store & Franchise Association study, the country’s 486,000 bubble tea stores were expecting a 40% rise in yearly sales in 2023, reaching a market size of around 145 billion yuan.
But with low product differentiation, competition has been fierce among players. Another industry giant, ChaBaiDao, also submitted its Hong Kong IPO application just a few months ago.
“I think there is a big rush to IPO right now, as generally speaking these chains have been expanding aggressively but have had to be willing to lose money to do so,” said Ben Cavender, managing director at China Market Research Group.
“Whoever can IPO the fastest and get to a stable operating position may be the winner over the long term.”
This company is a very savvy operator in terms of acquiring users through social media platforms. They were early to Pinterest. They were early to TikTok. They were actually the most talked about brand on TikTok globally the last year. But to be honest, price is a bigger driver. This platform, Shein, the prices on there, it makes Amazon look positively expensive. I don’t know if you have any personal experience of this, but if you talk to anyone on there, the prices are significantly lower than you would expect. And that’s really attractive to their target customer base…
Their model is actually quite innovative. And it’s difficult for their competitors to copy because the thing about fashion is, fashion is very volatile, especially fast fashion. And so if you’re able to operate faster than your competitors in terms of assessing and identifying new trends and getting those garments spinning up, SKUs that are doing well, faster than other people, then you are able to reduce markdowns. And you are able to lower your costs and increase– reach more customers.
That’s what Zara’s done, essentially. From the 1990s, they basically invented fast fashion and created their system, which works for a store network. In the last, say, decade, we’ve seen a new breed of DTC platforms. Brands like Fashion Nova and, in the UK, Boohoo and Asos– which are already publicly listed companies– are doing quite well. Shein, we can view as just taking this up another level. They are faster than the ultra fast item in real-time retail.
In terms of the– they’re taking the data that they’re seeing on their app in, say, America and using that and connecting that directly to the Chinese factory floor. In terms of when people start putting items in a basket in America, they know, OK, we’re going to sell more of this. And they immediately run that through to the factory floor and start ordering more and ordering materials. And the algorithms automate everything. So it’s really quite an innovation that they’ve managed to achieve…
The reason why they’re able to get that price is because the supply chain is unbelievably efficient. They don’t technically own the factories, but they’re so closely linked up with their supply chain management software, that it’s almost– it works effectively as they did, if they did. They’ve been criticized for a variety of things, as you rightly pointed out. There is questions over the sustainability of fast fashion and the environmental impacts. I think those are things that we do need to look at.
But in this context of the target consumer that they’re reaching, obviously, there are people concerned about these things. But it seems that, at least for the people who are buying on Shein, they’re less concerned about the environmental impacts and more concerned about their immediate needs to stay on top of the fashion trends within their social circle.
There’s also been complaints about suspicions of them using things like child labor. I think that those are a little bit hard to believe, given where they’re based in Guangzhou being one of the highest GDPs in China. And so, yes, we do need to look at these issues. But overall, I think these are wider questions about the fast fashion industry that could be applied to many, many companies.
The massive US$34.5 billion IPO by Jack Ma’s Ant Group has been derailed by regulatory action, days before its listing, and that does not make the investors happy, says political analyst Shaun Rein at AP. The decision also might rattle Chinese entrepreneurs who were considering selling shares on their own country’s market, said Rein.
AP:
The planned market launch of Ant, spun off from Alibaba Group, the world’s biggest e-commerce company by sales volume, symbolized China’s rebound and added to a string of smaller offerings by biotech and other new companies. In an unusual move, it was due to trade in both Shanghai for mainland investors and in Hong Kong for international buyers.
A brief official announcement Tuesday cited regulatory changes. It gave no details, but authorities have tightened controls on lending by online finance platforms and raised the amount of capital they must have.
The abrupt action might make investors more cautious about China, said Shaun Rein of China Market Research Group in Shanghai, whose clients include hedge funds and institutional investors. He said they are left to wonder whether regulators were worried about risks or acted out of irritation at Ant founder Jack Ma, China’s richest entrepreneur, who publicly complained they hamper innovation.
“Whatever it is, it doesn’t make the system look good,” Rein said. “It makes a lot of global institutional investors more nervous about investing into China.”
Ant said Wednesday it will return subscription fees to investors, suggesting it might be some time before the company is allowed to offer shares to the public…
The decision also might rattle Chinese entrepreneurs who were considering selling shares on their own country’s market, said Rein.
“Until yesterday, every entrepreneur I talked to wanted to go public in the mainland, because they thought valuations would be better, and it might make them look better in front of the government,” said Rein. “Now, after Jack Ma, I’m not sure what they’re going to do.”
Jack Ma’s Ant Group is heading for the largest IPO ever with a value of US$35,5 billion. Shanghai-based business analyst Shaun Rein explains how the Ant Group became the largest fintech company ever to AP.
AP:
Alipay and WeChat Pay have helped make Chinese society virtually cashless, at least in big cities, with consumers and merchants alike relying on digital payments using their phones.
“Think of Alipay as Visa, MasterCard, Citibank, Fidelity… all rolled up into one,” said Shaun Rein, founder and managing director of China Market Research Group in Shanghai. “On the Alipay platform, you pay for things, you buy insurance, you buy wealth management. Your whole life revolves around Alipay.”
Walk into a supermarket in China and one would be hard-pressed to find a customer digging around for loose change to pay for groceries. Instead, cashiers scan a QR code on a customer’s smartphone to deduct money from their Alipay or WeChat Pay digital wallets. The transaction takes seconds.
In restaurants, groups of friends often split the bill by transferring money to each other using their digital wallets, similar to how the Venmo app is used in the U.S.
“Ant Group is so valuable because Alipay is used on a day to day basis by a billion people on all of their purchases,” said Rein. “The scale of fintech in China dwarfs the regular financial transaction potential in the United States.”
Jack Ma's Ant Group is heading for a listing at the Hong Kong and Shanghai stock markets, for possibly up to 300 billion US dollars, the largest in the world ever. Business analyst Shaun Rein looks into the company's background and its largest success in China, Alipay, on the BBC.
Registering offshore, through so-called VIE' or variable interest entities, is more popular than ever for Chinese companies, even though the Chinese government tries to stop this circumventing trick. Tencent Music Entertainment was the last one to use it for its IPO and get away with it because investors seldom read the disclosure, says Paul Gillis, accounting professor at the Peking University, at the Nikkei Asian Review. And for good reasons.
The Nikkei Asian Review:
As with the Tencent Music prospectus, VIE risks are regularly disclosed in the IPO process -- for those paying enough attention.
Referring to Tencent Music's discussion of its use of VIEs, Paul Gillis, an accounting professor at Peking University in Beijing, said: "It is extensively disclosed, but the filling is 300 pages long. Many investors do not read it."
Meanwhile, it remains unclear when Beijing will move forward with the draft foreign investment law, as Tencent Music's prospectus notes.
Said Gillis, "If investors cannot stand ambiguity, they should stay out of China."
For many outside China the successful IPO on Nasdaq of group purchasing platform Pinduoduo, mildly comparable to the less successful Groupon, came as a surprise. Shanghai-based business analyst Ben Cavender tries to explain the success at Inkstone. It uses the popular Tencent platforms WeChat and QQ.
Inkstone:
Pinduoduo has a mini-game called “Duo Duo Orchard,” in which players plant a tree of their choosing on the app and collect points by logging in daily, making purchases and inviting friends. After collecting a certain number of points, users will receive a box of fresh fruit.
Pinduoduo’s social media features give it “more stickiness” than Groupon, according to Ben Cavender, a senior analyst with the Shanghai-based China Market Research Group.
“It generates a lot more interest and there’s an entertainment value to the shopping process,” Cavender told Inkstone...
China’s online shopping market has long been dominated by two giants, Taobao of Alibaba (which also owns Inkstone) and JD.com.
Pingduoduo had 168 million monthly active users in May, behind Alibaba's 502 million and JD.com’s 273 million, according to data compiled by consulting firm Jiguang.
“I think increasingly what we are going to see is more space for different kinds of models,” Cavender says. “It may take some share away from Taobao and some of the low-end market share away from [Taobao-owned] Tmall and JD.com. But Pinduoduo’s not going to replace them.”
Currently, the majority of Pinduoduo’s users live in cities with populations of fewer than three million people – small cities with users who are more price-sensitive.
In the more affluent cities, Taobao and JD.com still dominate...
“If Alibaba decides that’s a market they want to own, they are going to spend a lot of money, and Tencent has to decide how much they want to support Pinduoduo’s long-term growth,” Cavender says.
The Hong Kong IPO of China's success story Xiaomi disappointed greatly. Beida accounting professor Paul Gillis explains at Quartz why the investors did not buy the company's valuation. "I think it is hard for investors to buy the valuation."
Quartz:
What accounts for the listing’s tepid response? One read is that retail investors didn’t buy Xiaomi’s pre-IPO narrative any more than early subscribers did.
In the run-up to the IPO, found Lei Jun described the company’s business model as a “new species” and a “triathlon model” with three components—smartphone sales, third-party hardware sales, and “internet service” sales, namely ads and media. While smartphones drive most of the revenue, the company hopes that internet services will eventually drive most of the profit (currently at about 40%)...
It’s an unprecedented structure with many uncertainties. The Android smartphone business is notoriously unstable and has turned giants like Sony, HTC, and Nokia into casualties. Meanwhile, there has never been a tech company to successfully sell undifferentiated, commodity hardware as a means to boost an internet business unit—which might account for investor skepticism.
“I think it is hard for investors to buy the valuation. The company has to transform to justify the valuation and there is too much uncertainty about whether it can do that,” says Paul Gillis, who teaches accounting at Peking University in Beijing.
Xiaomi filed documents in early May to list in Hong Kong. The company is expected to raise $10 billion from the offering and aimed for a valuation of about $100 billion, despite the head of the company’s top lawyer Zhang Liang said in March 2015 that the company had no plans to list within the next 5 years.
The application came after the China Securities Regulatory Commission reportedly issued new listing rules in April in hopes of retaining potential technological giants in the home market, by promising fast-tracked approvals and easing regulations, on top of additional incentives.
The new rules allow non-listed local companies to conduct initial public offerings without meeting the traditional financial requirements, according to reports.
“Changing the requirements will unlock opportunities for both start-ups and investors and is something that should have been done years ago,” said Shaun Rein, managing director of the China Market Research Group in Shanghai.
“Many Chinese firms that would prefer to go public in China ended up listed in the US instead because of onerous profit requirements. In fact, many great companies like Amazon never would have been allowed to go public in China if they had been Chinese start-ups.”
Meanwhile, the pain of losing out on a listing by Chinese e-commerce juggernaut Alibaba in 2014 has also prompted the Hong Kong Exchanges and Clearing (HKEX) to examine new measures.
Dalian Wanda Group’s commercial property arm secured a US$5.4 billion investment from a group led by tech giant Tencent Holdings, a major move for the troubled real estate giant, hoping to get a Shanghai IPO, says business analyst Ben Cavenderto Reuters.
Reuters:
The 34 billion yuan deal for a 14 percent stake in Wanda Commercial could also help the unit get back on track with a plan to relist in Shanghai after a bold and ultimately expensive decision to withdraw from the Hong Kong exchange in 2016.
“From Wanda’s perspective it seems a good deal. They’ve overextended with expansions and acquisitions over the last couple of years,” said Ben Cavender, Shanghai-based principal at China Market Research Group, adding that Wanda Commercial had now become a more “attractive mainland IPO candidate”.
The stake will be bought from existing investors who had been part of the $4.4 billion buyout fund created for Wanda Commercial’s delisting in 2016. Those investors had been promised up to 12 percent annual interest if it failed to relist in Shanghai within two years.
The Shanghai IPO has, however, been held up by mainland regulatory measures to tighten liquidity in the real estate sector. Wanda said in a statement that with its new investors it was looking to take the unit public “as soon as possible”.
The Tencent-led group includes major retailer Suning Commerce Group, e-commerce firm JD.com Inc and rival developer Sunac China, which bought some of Wanda’s theme park assets last year.
“The tech companies are seen as the darlings of China’s emergence as a global superpower. So, reputation-wise I think this is a good move for Wanda,” Cavender said.
Financial authorities in Beijing are playing with the idea to give tech firms a faster-track IPO in China, says accounting professor Paul Gillisat his weblog. Taking away some of the cumbersome restrictions for IPO's in China might lead to the expected abolishment of variable interest entity or VIE's, a side-track allowing Chinese firms to list in the US, he suggests.
Paul Gillis:
Chinese tech companies often also faced restrictions against foreign ownership. That should have blocked foreign venture capital investments and foreign IPOs, but a workaround was developed. The workaround was the variable interest entity (VIE), which enabled the listing of companies controlled through contracts instead of ownership. VIEs have been a source of pain for many investors, since the contracts proved difficult to enforce and control through contracts proved to be vastly inferior to control through actual ownership.
A few formerly US listed companies have succeeded in relisting in China. Before doing so they needed to restructure to get rid of the VIE structures and offshore structures (and control features) that had been put in place for the US listings.
The Reuter’s article points to three companies that may be the initial beneficiaries of the queue-jumping initiative - Ant Financial, the world's most valuable financial technology company, Zhong An Online Property and Casualty Insurance, and security software maker Qihoo 360 Technology Co. Ant and Zhong An would be doing IPOs, while Qihoo went private in 2016 and would be relisting in China.
It is not known whether China plans to change its rules to facilitate control structures. Ant is owned by Jack Ma and his associates. Jack Ma insisted on a control structure for Alibaba. It would also appear that it will be difficult for foreign investors to participate in these transactions, since foreigners can only purchase shares on the Chinese exchanges through the Qualified Foreign Institutional Investor (QFII) programs or the Hong Kong Connects.
I have been hearing rumors that China soon plans to announce that the VIE structure will no longer be tolerated for foreign investment, while at the same time grandfathering existing VIE structures. China had earlier proposed to change the foreign investment rules to exclude companies that were controlled by Chinese from restrictions, effectively encouraging the control structures, but these rules were not adopted when the foreign investment rules were modified last year.
If VIEs are banned (and the rules are actually enforced), it would likely mean the end of new US listings of Chinese tech (and other restricted sectors such as education and finance) companies. The queue-jumping program might foreshadow that announcement. The big losers would appear to be US venture capital firms and US investment banks.
The Public Company Accounting Oversight Board (PCAOB) will demand companies to identify senior partners of auditors who perform audits from January 31, 2017. But that means also that auditors responsible for hundreds of dodgy Chinese IPO´s in the US will never be identified, writes Beida accounting professor Paul Gillison this weblog.
Paul Gillis:
The rule is effective for audits completed after January 31, 2017. That means it will not be possible to identify the engagement partner on the many notorious audit failures that have happened in recent years among US-listed Chinese companies, since the information will be prospective only. Nevertheless, this is a good step forward, and will help to protect investors in the future.
The information is not required to be included in the company’s annual filings. Instead, the audit firm makes a separate filing with the PCAOB that will be available in a searchable database. I think companies should voluntarily disclose the name of their audit partner in their annual report to make this process easier for investors.
While auditor rotation is not required in the US (it is required for state owned enterprises in China), the audit partner on US listed companies must be rotated every five years. Audit committees should carefully vet proposed audit partners and ask direct questions about prior engagements the partner has been associated with. I know some large US-listed Chinese companies have rejected proposed audit partners because they were associated with frauds in the past.
Alibaba shares have gone up since their massive IPO, but the situation is very volatile, says business analyst Shaun Rein, according to the Drum. The hedge funds are waiting for their chances, and they might come soon as the company releases its figures on Thursday.
The Drum:
Speaking to the Financial Times Shaun Rein, head of China Market Research Group, said: “There is a lot of concern about just how sustainable is the hype around Alibabaa. The share price went out of control after the IPO but all the hedge funds we were talking to said: ‘We want to get in before anyone else does, and we want to get out before anyone else does.’ ”
One of the major concerns for US investors looking at Chinese companies were the so-called VIE-structures, moving the company to non-Chinese jurisdictions. The major success of Alibaba´s IPO has wiped away those concerns, says accounting professor Paul Gillis, and we might see a more subtle change, he writes on his weblog.
Paul Gillis:
Alibaba’s record IPO overcame concerns about Chinese stocks. Investors had been badly burned by Chinese stocks in the past few years, but they were en-thusiastic about Alibaba. There was considerable discussion of the risks of Chin-ese stocks, and in particular the variable interest entity (VIE) structure used by Alibaba and many other overseas listed Chinese stocks. These risks remain, al-though Alibaba’s offering might have changed the picture.
At the top of the list of concerns about Alibaba was the variable interest entity structure. I just searched Google news for variable interest entity and found 881 results. When I first wrote about VIEs in March 2011 nobody was talking about VIEs. It seems difficult to find anyone who is not aware of the structure today. The Alibaba IPO called considerable attention to the structure, including a report from a congressional commission and a letter from Senator Casey to the SEC. Certainly Chinese officials heard an earful about VIEs.
I think all this attention may help to bring a resolution to the VIE situation. I believe that the chance of Chinese regulators banning the VIE structure has fal-len below remote. Instead, I expect they will eventually move to modify for-eign investment rules to make the VIE structure obsolete. Changing the foreign in-vestment rules to allow direct foreign investment in Chinese companies in e-commerce could allow companies like Alibaba to get rid of both their VIE and their Cayman Island structures, to the great benefit of shareholders.
I expect that China may want to ensure that internet companies remain under the control of Chinese citizens, and Alibaba control structure that keeps Jack Ma in charge may be exactly what the doctor ordered. Allowing companies like Alibaba to directly list abroad without Cayman Island companies and VIEs might also allow Alibaba to seek a secondary stock listing on the Chinese stock ex-changes. Because of China’s strict exchange controls, most Chinese investors could not participate in the IPO of Alibaba.
VIE structures are highly scrutinized and Beida professor Paul Gillis is fighting those structures via the Cayman Islands and other tax havens, although they need economic reforms to be iradicated. On his accounting website he looks at the IPO document Alibaba had to file and awards them the golden VIE standard.
Paul Gillis:
Alibaba filed its long awaited Form F-1 to begin the formal march to its U.S. IPO. Alibaba is too big to qualify as an emerging growth company under the Jobs Act, so it was not allowed to do a confidential filing. Most Chinese IPOs file under the Jobs Act, meaning we see only the penultimate filing right before the IPO takes place. This filing is likely to go through several rounds of SEC review and I would speculate that the IPO is not likely to happen until early autumn. Significantly, the document presently includes audited financial statements for 3/31/13 and I expect it will need to be updated with the 3/31/14 accounts before it goes final.
There is a lot to absorb in this filing, so I focused on the headline news about Alibaba’s use of the variable interest entity. As expected, Alibaba has a lot of VIEs since much of its business is in restricted sectors. There is an interesting discussion of how Alipay was extracted from Alibaba in 2011 included in Footnote 4. Alipay is not in the deal, although 49.9% of its income is included through the deal to settle the VIE dispute and Alibaba will get at least $2 billion up to $6 billion if Alipay does an IPO. But it might be worth much more than that.
Alibaba makes a bold statement about its use of the VIE structure:
Our holding company structure differs from some of our peers in that we hold our material assets and operations, except for ICP and other licenses for regulated activities, in our wholly-foreign owned enterprises and most of our revenue is generated directly by the wholly-foreign owned enterprises.
In other words, Alibaba claims it has minimized the use of VIEs to the extent possible. I have long argued that the least risky VIE structures are those that minimize the amount of business conducted in the VIE. My old gold standard for the best VIE structure was Baidu. I now award that to Alibaba.
"This has been brewing for some time," said Jeremy Goldkorn, founder of Beijing-based media research firm Danwei.
"Why not get the money from the market, instead of the government, if they can," he told AFP.
Up to 10 state-owned media websites, including those of the People's Daily, state broadcaster China Central Television and the Xinhua news agency -- are planning domestic stock listings, state media said last year.
"If they are going to have state-controlled media companies that are successful in holding people's attention, then being run like commercial enterprises is going to be better," Goldkorn added.
