IPOs: eHi Sputters; Huayi, iQiyi Raise Funds

Bottom line: A weak debut for eHi reflects waning investor enthusiasm for Chinese IPOs, while a new $585 million investment in Huayi Bros reflects strong growth prospects for the independent filmmaker.

eHi IPO sputters out of the gate

A flurry of fund-raising events are in the headlines today, led by a weak trading debut for car rental specialist eHi Car Services (NYSE: EHIC) and a big capital infusion for Huayi Bros (Shenzhen: 300027), one of China’s leading independent film makers. Rounding out the activity are reports confirming that smartphone high-flyer Xiaomi has made its largest investment to date, spending $300 million for a stake in iQiyi, China’s second largest online video site owned by Internet search leader Baidu (Nasdaq: BIDU).

This flurry of year-end deals each has a slightly different back-story, and I’ll discuss that shortly. But the bigger story is that there are still billions of dollars in capital slushing around the market looking for good China tech and media investments, and also for other opportunities in well-run venture-funded companies.

eHi was initially looking like one of those companies with good potential, hoping to follow the big success of a Hong Kong IPO in September by larger rival CAR Inc (HKEx: 699). (previous post) CAR’s shares are now up 38 percent from their IPO price, but eHi had no such luck as its shares actually dipped 2.5 percent from their IPO price of $12 to end their first trading day at $11.70. (English article; Chinese article)

eHi was lucky to even make this IPO at all, as the deal was suddenly delayed from a planned debut last Friday after its underwriters and regulators received anonymous letters claiming the company had submitted false information. The allegations were later determined to be baseless, but clearly investors weren’t too excited about the offering.

The lackluster debut follows a similar weak start last week for solar plant builder Sky Solar (Nasdaq: SKYS), which was finally listed after dramatically cutting the size of its IPO. The weak debuts reflect the fact that the most attractive venture-backed Chinese companies that were waiting to list have all completed IPOs already, and most companies hoping to offer shares by year end are second-tier players.

Next let’s look at the deal that will see Huayi Bros receive 3.6 billion yuan ($585 million) in new capital from a group of investors that includes firms headed by the “power trio” of 3 men surnamed Ma. The 3 investors are Alibaba (NYSE: BABA), founded by Jack Ma; Tencent (HKEx: 700), founded by Pony Ma; and Ping An Insurance (HKEx: 2318; Shanghai: 601318), whose chairman is Ma Mingzhe. (Chinese article)

Assuming the 3 Ma’s are providing most of the money, the figure would equate to about $200 million in investment from each of them. That’s not a huge figure for any of these 3 companies, and is in line with recent investments by Alibaba and Tencent in the entertainment sector. Huayi is certainly a good choice, as it’s one of China’s best respected and most successful independent film makers.

I’ve saved the Xiaomi investment in iQiyi for last, since this deal was first reported a week ago as part of a pair of tie-ups. The first of those has already been announced, and has Xiaomi taking a small stake in leading online video site Youku Tudou as part of a strategic tie-up. This second investment looks a bit larger, and is likely to give Xiaomi a 10-15 percent stake in iQiyi. Both deals are aimed at giving Xiaomi access to more filmed entertainment for its smartphone users. (Chinese article)

It’s not too surprising that Xiaomi is putting bigger money into iQiyi, since Youku Tudou already sold nearly 20 percent of itself to Alibaba earlier this year. Xiaomi is growing fast and able to raise big money, but it still can’t afford to spend its cash too freely at this stage in its development.

Baidu has previously discussed an IPO for iQiyi, and I wouldn’t be surprised to see such a listing in the first half of next year. That could help Xiaomi quickly log some solid gains on its iQiyi investment if the IPO is well received, and possibly even sell some of its stake for a quick profit.

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