Chinese tech firms forced into ‘blood listings’ as capital dries up

A growing number of Chinese tech start-ups, once the darlings of equity markets, are willing to list shares publicly in China at valuations lower than during private funding rounds in so-called blood listings.

Unlike tech sector woes elsewhere, triggered mainly by rising interest rates, the misery in China comes from frothy tech markets and disruptions from harsh COVID-19 restrictions. Public offerings at slashed valuations could translate into losses for venture capitalists in late funding rounds.

CloudWalk Technology Co, hailed as one of China’s “Four Dragons” in Artificial Intelligence (AI), debuts in Shanghai on Friday following an initial public offering that slashed its pre-IPO valuation by 29%.

Smarter Microelectronics (Guangzhou) Co, a loss-making chipmaker, submitted an application this month for a Shanghai IPO that could see a 78% slump in valuation, according to calculations based on the company’s draft prospectus.

And Wuxi Shoulder Electronics Co is waiting for regulatory registration for a Shanghai IPO that could see its value slump one-third from its private market price tag.

Since the U.S.-China trade war begun during the Trump administration, money had been gushing into AI, semiconductor and other sectors crucial for Beijing’s tech self-sufficiency, fuelled by a cocktail of patriotism and greed, said Shenzhen-based venture capitalist Abraham Zhang.

“Now, the bubble is bursting, and you start to see many blood-listings,” said Zhang, chairman of venture capital firm China Europe Capital, referring to IPOs at valuations below their private capital raisings.

Many AI start-ups, for example, “are burning a lot of cash and need massive funding, but their fundamentals don’t support high valuations in the current environment,” he said.

China’s tech-focused STAR Market has tumbled nearly 30% this year, and many stocks have fallen below IPO prices on debut.

LIMITED FUNDING CHANNELS

For capital-hungry Chinese tech start-ups seeking domestic IPOs, other avenues of funding have been squeezed or temporarily shut. Offshore listings have been almost halted for nearly a year due to China’s tighter scrutiny of foreign IPOs. Measures to combat COVID-19 outbreaks have also disrupted deal flows.

“Most investment deals are on hold … and investors are increasingly wary about high valuations,” said Devin Liu, vice president of Shanghai-based Yiti Capital, which advises on tech-focused investments in the private market.

In Shanghai and Beijing, once China’s busiest cities in terms of deal-making, venture capital and private equity investment plunged more than 70% from a year earlier in April due to COVID outbreaks, according to data provider CVSource.

“It’s okay for you to discuss projects online, but there’s no decision-making,” said Andrew Qian, CEO of Shanghai-based New Access Capital, who expects one-fifth of venture capitalists to be “lying flat” – using a popular Chinese phrase for inaction – or doing no deals this year.

Megvii Technology Ltd, a facial-recognition technology firm blacklisted by the United States, is nearing an IPO on Shanghai’s STAR Market after a failed attempt to list in Hong Kong due to U.S. sanctions.

Dented valuations are already hurting venture capitalists.

Shenzhen-based private equity firm Conwin Capital reported a 78% plunge in first-quarter earnings, citing a drop in valuations of its portfolio companies.

There are more than 15,000 registered VC and PE companies in China, and Zhang of China Europe Capital said many VC investors lack deep tech sector expertise and an industry shake-up would ideally slash that number by two-thirds.

“The days of cherry-picking are over, and now you need to start planting cherry trees yourself,” he said.

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