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Four filings in 24 hours: Inside China’s IPO blitz in the US

Four China-based companies with VC backing either filed for IPOs or revealed IPO price ranges on Monday. What’s prompting the push?

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Early this week, the physical gap between Beijing and New York proved no hindrance for a group of Chinese startups set to join the growing wave of VC-backed IPOs on Wall Street.

Plastic surgery specialist So-Young International and social ecommerce site Yunji set price ranges for their respective upcoming debuts, while streaming startup DouYu International and would-be Starbucks competitor Luckin Coffee submitted initial filings to the SEC indicating their intent to list. Given their Chinese headquarters, all four companies will offer American Depository Shares (ADS), a variation of typical equity shares designed to reduce the difficulties of foreign companies trading in the US.

Let’s take a closer look at what Monday’s flood of filings revealed.

Luckin Coffee submitted an F-1 filing (the equivalent of an S-1 for non-US companies) indicating plans to trade on the NASDAQ. Other concrete details were scarce, but Reuters reported the company plans to raise between $500 million and $800 million in the listing, which is expected in May, leading to a valuation between $4 billion and $5 billion. That would be up from a reported $2.9 billion valuation that came with a $150 million round of funding led by BlackRock just last week. The coffee chain reported a 2018 net loss of about $241.3 million, but since it was founded less than two years ago, there aren’t any other annual numbers for comparison.

If Starbucks is the sort of company Luckin Coffee aspires to become, then Twitch is perhaps the best model for DouYu, which operates a streaming service for video games. The Tencent-backed company’s F-1 revealed that it’s seeking up to $500 million in an IPO on the NYSE, which will come more than a year after DouYu last raised cash, a $632 million round last March at an estimated valuation of $1.5 billion. The company reported a 2018 net loss of about $127.4 million, compared to about $91 million in 2017.

The IPO process is a bit farther along for Yunji, which revealed plans to offer 13.5 million ADSs for between $11 and $13 apiece in an upcoming listing on the NASDAQ, with each ADS representing 10 ordinary shares. A midpoint pricing would raise $162 million and result in a fully diluted market value of $2.8 billion, per Renaissance Capital. That’s a significant change since September, when a Reuters report indicated the ecommerce company hoped to raise as much as $1 billion at a valuation of up to $10 billion. Yunji reported a net loss of $8.2 million for 2018, less than its 2017 loss of about $15.7 million.

And then there’s So-Young International, the operator of a plastic surgery marketplace, which filed with the SEC plans to offer 13 million ADSs—which will be the equivalent of 10 million ordinary shares—for between $11.80 and $13.80 each. A midpoint pricing would raise about $166 million and result in a fully diluted valuation of $1.4 billion, again according to Renaissance Capital. Of the four companies, So-Young is the only one that reported a profit for 2018, finishing the year about $8 million in the black.

Unprofitability is in style

So-Young aside, the four looming IPOs reflect a somewhat recent trend of companies going public with no existing profits, leading investors to buy in on hope and speculation alone. Lyft, Pinterest and Uber are among the other high-profile examples. To investors, profitability has often proven unimportant when compared to a company’s potential to disrupt an industry.

While this phenomenon could be attributed to many factors, the bull run in the US stock market is perhaps one of them, setting the mood for an increased appetite for risk among investors. Should the bullish market turn bearish, or should these newly public companies fail to continue the chorus of hope and optimism, investors in such stocks may experience heavy corrective losses as the rug is pulled out from underneath.

It could all be suggestive of a VC-backed IPO bubble, as investors throw cash at companies with little solid evidence to suggest they can eventually meet extremely high expectations. Name recognition and public perception may also be contributing factors; after all, companies like Lyft, Pinterest and Uber have become ubiquitous in the smartphone-based world. Among the recent crush of unicorn IPOs, Zoom Video Communications is a notable exception in that it actually turns a profit—but even Zoom is being priced for huge anticipated growth based on its present-day financials.

Perhaps all these companies will be wildly profitable in a decade’s time, and perhaps not. But either way, China’s blitz of the American markets is a sign that companies from all over are eager to capitalize on the current bullish sentiment.

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    Written by Ian Agar

    Ian Agar was a financial writer at PitchBook covering venture capital.

    A native of Southern California, he joined the US Coast Guard and received his BA in Psychology from American Military University. After leaving the military, he was a writer for SeekingAlpha for over six years covering blue-chip stocks and fast-growing small-cap companies. Although studying charts and financial reports excite him, his wife is his real passion in life—especially when they both spend time studying charts and financial reports together.

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