IPOs: SF Express Eyes Back Door; China Music in NY; ZTE Thinks Small

Bottom line: A backdoor listing plan by SF Express in Shenzhen, a New York IPO plan by China Music Corp and 3 new China OTC listings by ZTE units reflect creative approaches to new listings by Chinese firms due to bottlenecks for traditional IPOs.

SF Express eyes backdoor listing

A trio of IPO stories in the headlines are quite revealing, as none are happening through traditional channels on China’s 3 main stock exchanges in Shanghai and Shenzhen. Instead, the largest of the 3 plans has parcel delivery giant SF Express eyeing a backdoor listing using a shell company from the minerals business. Meantime, music streaming company China Music Corp has popped up across the Pacific in New York, where it is reportedly planning an IPO that could be the largest of its kind this year.

Last but not least is telecoms giant ZTE (HKEx: 763; Shenzhen: 000063), which has just announced the third listing this year on China’s over-the-counter (OTC) board in Beijing, often called the “new third board.”

The fact that none of these offerings is coming through traditional channels on China’s 3 main stock exchanges reflects the reality that such new listings have slowed to a crawl this year, creating a huge waiting line. That bottleneck is due to an extremely conservative mood at China’s securities regulator, which worries that allowing too many IPOs could spark a new sell-off like the one at the start of this year.

But resourceful companies are finding ways around that bottleneck, starting with SF Express, which is moving ahead with a backdoor listing using a mineral company called Dingtai Rare Earth & New Materials (Shenzhen: 002352). (English article; Chinese article) Dingtai revealed the move in a regulatory filing, and media are reporting the deal could value SF at more than 40 billion yuan ($6.2 billion).

This kind of backdoor listing was in the headlines a couple of weeks ago, when word emerged that China’s securities regulator was moving to halt such listings or at least slow the pace to prevent them from getting out of control. (previous post) SF’s move appears to show it’s confident that the regulator will let its plan proceed, allowing it to join other a group of other money-losing parcel delivery companies making similar listings.

Bucking the Tide

Next there’s China Music, which is backed by Internet giant Tencent (HKEx: 700) and has reportedly hired investment banks to make a New York listing worth $300-$600 million. (English article; Chinese article) In this case the choice of New York is significant because far more Chinese companies have been abandoning US listings recently in hopes of making IPOs in China where they hope to get higher valuations.

But the uncertainty in China has suddenly made New York a more attractive option again, and I’ve said for a while that Chinese companies that are leaders in their field can still do well with such listings. Other companies moving towards New York listings this year include data center operator GDS services, and online English teaching site 51Talk English, which are aiming to raise $300 million and $100 million, respectively. (previous post) Another delivery company, ZTO, is also looking at a potential US IPO to raise up to $2 billion, possibly by the end of this year. (previous post)

Last but not least there’s ZTE, which has just announced a plan to list its software unit ZTEsoft on China’s National Equities Exchange Quotation (NEEQ) board, an OTC-style board in Beijing often called the new third board. (HKEx announcement) One media report notes that this would be the third NEEQ listing for a ZTE company this year, reflecting rapid growth for this thinly-traded exchange that is off-limits to everyone except the largest private and institutional investors. (Chinese article)

At the end of the day, it’s quite encouraging to see this kind of activity occurring despite the regulator’s conservatism. This kind of approach reflects a sort of Darwinian “survival of the fittest” selection process, since only the most resourceful and innovative companies are likely to take this kind of creative route to market. That means all of these companies should be naturally higher quality investment choices than the many stodgier state-run firms that dominate the pipeline for traditional IPOs in China.

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