Chinese technology firms are suffering from a shift in sentiment. Even Cheetah Mobile, a spin-off from popular Chinese software developer Kingsoft, had to rely on support from shareholders Xiaomi and Baidu to get its initial public offering over the line earlier this month.
It wasn’t supposed to be like that. Hong Kong-listed Kingsoft chose to spin off Cheetah in New York as a way to join the party that other US-listed Chinese tech firms have enjoyed over the past few years — rich valuations and abundant liquidity.
Cheetah managed to price its IPO close to the top of its targeted range but even the help of friends and family hasn’t stopped its share price from falling since then. A cyclical shift that has affected all of China’s US-listed technology companies is to blame, according to some analysts and bankers.
"We’re seeing a fairly significant correction out of high multiple, high growth stocks into more value-driven stocks,” said Joaquin Rodriguez Torres, head of technology, media and telecom investment banking for Asia at Deutsche Bank, in an interview with FinanceAsia.
The bears worried that technology stocks had become too expensive after a strong run-up in prices over the past year.
After peaking at $58.32 a share in early March, shares in Chinese internet company 58.com are down more than 30%, closing at $39.19 on May 20. Similarly, AutoHome, another mainland Chinese internet company that listed in the US last year, hit a 2014 high on March 5 of $51.76 and has also seen its shares lose more than 30%.
In the fourth quarter last year, these two companies, along with Qunar and 500.com, kick-started the latest rally with a batch of successful IPOs.
“The sentiment was very good; high quality companies got people’s attention — people were eager to get access to the management teams and make a positive impression on them,” Rodriguez Torres said. “Now the sentiment has changed and even the high quality companies have to make a bigger effort to get investors’ attention.”
Stock market cycle
There is a natural progression in stock market cycles. Strong companies that have a solid investment story can open an IPO window for the whole sector — as Qunar did. Over time it gets harder and harder to sell the idea that each new IPO is as good as the previous one.
Investors are now much pickier as they realise that the rich valuations in the sector offer miserly returns even if they get the picks right. But not all investors are so sceptical. Technology bulls remain oblivious to what they see as short-term gyrations and are still confident in the secular growth stories that underpin their convictions.
“It’s about productivity,” Mark Mobius, executive chairman of Franklin Templeton’s emerging markets group, said in an interview. “Every time you’re lowering prices and speeding up delivery you’re increasing productivity dramatically, and that's in a field — services — which normally would be considered very complicated.”
If such bullish views are on the money, the pause in China’s technology rally could be just that: a temporary blip. With US interest rates heading higher, investors may struggle to find better returns than those offered by China’s technology firms.
“Investors are in the business of putting money to work, so now that macro volatility has fallen they need to make real investment decisions — and the reality is that there’s no better way to generate returns than to invest in high-growth companies: companies that are profitable, disruptive and can sustain growth without having to raise more capital,” Rodriguez Torres said. “That means tech.”
