PODCAST: A Bubble Tea IPO Freeze, and a Revenue-less Drug Maker

China’s securities regulator puts the brakes on new bubble tea IPOs in Hong Kong. And former drug making highflyer Ascletis has become revenue-less after its earlier drugs fizzled.

By Doug Young & Rene Vanguestaine

Recent news surrounding the suspension of new bubble tea IPOs in Hong Kong paints an evolving picture of the broader fundamental and regulatory environment for companies looking to go public. The halt on new bubble tea company listings, reportedly mandated by China’s securities regulator, points to both a shift in market sentiment for these popular beverages and the expanding influence of the mainland on Hong Kong’s financial landscape.

The bubble tea sector, once seen as a promising growth story, has suffered a dramatic loss of investor interest. Despite its initial hype, Chabaidao’s shares have lost almost two thirds of their value since their IPO in April and Nayuki is down about 60% this year. While the bubble tea phenomenon initially captured the imagination of investors, this excitement has dissipated, giving way to harsh realities: weak consumer sentiment, market saturation, and the classic price-driven competition that often undercuts profitability.

High unemployment and salary cuts have contributed to a drop in consumer spending across China, affecting sectors like bubble tea that are driven by discretionary income. A government stimulus package might offer temporary relief, but the fundamental weaknesses in consumer spending power remain largely unaddressed. The bubble tea craze was a fad that, in retrospect, may have never warranted the initial investor enthusiasm it received. With more and more competitors entering the market, the sector quickly fell into a race to the bottom, where price, rather than quality, became the primary battleground.

Adding to the challenges for bubble tea IPOs is the intervention by China’s securities regulator in Hong Kong’s listing process. Typically, Hong Kong has been a more market-oriented jurisdiction, separate from the regulatory pressures seen in the domestic A-share market in China. This recent move to freeze new listings—apparently in response to poor post-IPO performance—is a notable development.

Such intervention seems to aim at shoring up valuations of existing players by limiting the number of new entrants, which echoes the broader trend in China, where the government’s influence often aims to align market activity with broader economic and political objectives, such as favoring chip manufacturers and renewable energy companies.

The Revenue-less Drug Maker

Ascletis was a pioneer in listing as a money-losing company under a rule change that allowed biotech firms to go public before turning a profit. However, the company’s subsequent failure to generate revenue and its heavy reliance on cash reserves to sustain operations exemplify the high-risk nature of biotech investments.

Recent announcements from Ascletis about a new weight-loss drug have given some investors hope, but the reality is that such drugs may take years to come to fruition, if they succeed at all. For those who have already experienced significant losses in this space, holding on may seem like the only option, but the inherent risks remain substantial.

The challenges faced by Ascletis are emblematic of the broader difficulties inherent in the biotech sector, not only in China, but also for the whole world. Drug development is characterized by a lengthy and uncertain process. Typically, drug development involves multiple trial phases—often three or more—and many drugs that show promise in early trials ultimately fail to reach the market. The cost of developing these drugs is substantial, and when a drug fails at a late stage, it leaves the company with significant expenses and no revenue to show for it. This creates a high-risk environment where only those with deep pockets and a high tolerance for uncertainty can realistically hope to see a return.

The takeaway for investors is clear: the biotech sector is not for the faint of heart. Without a deep understanding of drug development and regulatory processes, there won’t be a solid basis for expecting a positive return on investment.

About China Inc

China Inc by Bamboo Works discusses the latest developments on Chinese companies listed in Hong Kong and the United States to drive informed decision-making for investors and others interested in this dynamic group of companies.

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