China’s Tech Fortunes Tumble As Investors Turn Away From Public Listings
Technology companies in China have minted a slew of new billionaires worth almost $30.8 billion this year, but many of those fortunes are now sliding downward as investors grow increasingly skeptical of the sector’s outlook for future growth.
Smartphone maker Xiaomi was the top wealth creator among the Chinese tech firms that recently floated their shares publicly, lifting cofounders Hong Feng, Li Wanqiang and Wong Kong Kat into the billionaire ranks alongside partners Lei Jun and Lin Bin.
The other notable newcomers include ex-Google engineer Colin Huang who attained his billionaire status when e-commerce firm Pinduoduo went public on the Nasdaq, and Mu Rongjun joined him two months later with the Hong Kong listing of Meituan Dianping, a food review and delivery app. Zeng Fangqin became a billionaire when she completed a backdoor listing on the Shenzhen stock exchange with her Lingyi Technology, a component supplier to the smartphone industry that counts Apple and Hauwei as customers.
But the initial enthusiasm among investors has proven short-lived. Shares of Xiaomi, Meituan Dianping and Lingyi have already given back all their gains and are now trading below their debut prices. Pinduoduo has only just managed to retain a modest gain. While macro issues from an escalating trade war to China’s own economic malaise have all played a role, the losses can also be said to be the companies’ own making: Lofty valuations attained during earlier fundraising rounds have proven difficult to maintain as investors increasingly question their growth prospects for the longer term.
“Investors like companies that are stable and can deliver sustained growth,” says Ken Xu, a partner at Shanghai-based investment firm Gobi Partners. “Many of China’s tech companies still need to prove themselves.”
Xiaomi recently announced that it already shipped a record 100 million smartphones as of October this year, completing its annual target two months earlier than originally planned. The Beijing-based company also launched the MIX 3, its most expensive smartphone to date, signaling the brand’s ambition to move upscale and break into the higher end of the market.
But investors seem unimpressed. Xiaomi’s market value has dropped almost 30% since it listed in early July, which has shaved more than $12 billion off the collective wealth of its five founders.
Analysts point to increasing competition in China’s shrinking smartphone market along with a likely negative impact of the trade war on Xiaomi’s global supply chain for its existing business lines. Over the longer term, the company says it wants to persuade price-sensitive customers to shell out more money for internet services like music and games which offer much better margins than smartphones and other devices. But in the first half this year, services still only accounted for 9% of the company’s total revenues.
“Xiaomi really needs to show how it is dealing with the macro challenges and better positioning of its brand,” says Nicole Peng, an analyst at market research firm Canalys.
Meituan Dianping has followed a similar trajectory. Shares of the company are trading 10% below its debut price, wiping more than $500 million off Wang’s net worth to its current level of $5.3 billion. Many Chinese tech firms like Meituan Dianping are struggling against headwinds that range from declining user numbers to heavy competition, which seems likely to heat up even further as more tech listings join the fray for investors’ attention. The bitcoin mining giant Bitmain, founded by billionaires Wu Jihan and Zhan Micree, are among a long list of companies that have already expressed an interest in going public in the coming months.
“There is more supply of tech stocks than demand at the moment,” Gobi’s Xu says. “Investors don’t have a lot of reasons to jump into companies with very high valuations.”
To be sure, this doesn’t mean China’s tech boom is completely over, because some top-tier firms are still able to fetch eye-popping valuations in the private market. Late last month, Beijing-based Bytedance successfully raised $3 billion at a $75 billion valuation, which effectively makes it the world’s largest internet startup and gives the company’s founder, Zhang Yiming a net worth of $6.8 billion. Bytedance, which is best known for its Toutiao news app and the Douyin music platform, has not been buffeted by the same headwinds and growth uncertainties affecting its publicly listed peers.
“Either there is an agreement on trade or the consumption economy in China proves to be resilient to U.S. tariffs,” says Rob Sanderson, managing director at New York-based MKM Partners. “For the stocks to improve, one of those two things has to occur.”
Post written by Yue Wang & Robert Olsen
This article originally appeared in Forbes.