Chinese firms face renewed scrutiny from Wall Street and at home

“I guess they tried to kill the monkey to scare the pigeons, but the pigeons didn’t get scared.” – on why Beijing may be expanding its antitrust investigation in the online travel industry.

Key Takeaways:

• World Road’s decision to sharply upsize its Nasdaq IPO highlights the severe hurdles and heightened scrutiny facing small Chinese listings in the U.S.
• China’s unexpected antitrust investigations into second-tier travel platforms signal Beijing’s ongoing anxiety over weak domestic consumption

By Rene Vanguestaine and Doug Young

We’re seeing a fascinating, regulatory squeeze on Chinese companies these days coming from two fronts. On one hand, the window for offshore listings on Wall Street remains barely cracked open, guarded by increasingly stringent requirements. On the other, domestic businesses are facing an extended wave of antitrust scrutiny as Beijing struggles to resuscitate a sluggish consumer economy. These developments — one on the Nasdaq and the other in China’s online travel sector — share a common thread: companies are navigating an era where regulatory patience has run extremely thin.

We’ll start with World Road Inc., a cross-border e-commerce logistics company that has become a rare breed this year by applying for a Nasdaq listing. The company recently quadrupled its original fundraising target from $7.5 million to $33 million. This isn’t necessarily a sign of booming confidence. Instead, it’s a forced move to meet a new Nasdaq requirement that all new Chinese listings raise at least $20 million.

As highlighted in recent analyses, U.S. listings by small Chinese companies have almost disappeared lately for two primary reasons. First, Chinese regulators have grown very cautious over the last six years regarding offshore listings, driven by geopolitics and perceived national security implications. Second, U.S. regulators — including the SEC, Nasdaq, and the NYSE — have finally gotten serious about cleaning up the market. For years, boutique underwriters brought small Chinese companies to the market, only for many to turn into “pump-and-dump” schemes that cost unsuspecting investors dearly.

What stands out about World Road’s listing is its highly inflated valuation. The company is seeking a price-to-sales (P/S) ratio of about 3.3. To put that into perspective, leading Chinese logistics giant SF Holding (6936.HK) trades at just 0.39, while U.S. giant UPS (UPS.US) trades at 0.93. We don’t think this fledgling company is in the same league as either of these industry heavyweights.

The company’s prospectus reveals enough red flags to suggest investors should pass on this one. World Road generated $55 million in revenues for its fiscal year ended March 31, but managed only $1.2 million in net income. It’s a business that only started in 2020, meaning it has a very limited operating track record. It utilizes a VIE structure and is smack in the middle of cross-border commerce at a time when trade relations between China and the U.S. — and soon Europe — are becoming increasingly difficult. Furthermore, the company hasn’t even received the necessary green light from China’s securities regulator, and glaringly, the filing doesn’t even name the underwriters.

But this doesn’t mean Chinese equities on Wall Street are entirely a thing of the past. For giants with real ambition and global footprints, such as Alibaba (BABA.US; 9988.HK), JD.com (JD.US; 9618.HK), and solar companies like Jinko Solar (JKS.US), a U.S. listing remains a crucial seal of approval. Short of drastic political action, we don’t expect these major players to voluntarily delist.

China’s long-winded probe against online travel platforms

Returning to the domestic front, we’re witnessing some surprising developments in China’s travel industry. Many assumed that a landmark 5.2 billion yuan ($777 million) antitrust fine against industry leader Trip.com (TCOM.US; 9961.HK) was the end of the regulatory scrutiny for the sector. Yet, China’s market regulator is currently investigating most of the industry’s major second-tier players, including Tongcheng (0780.HK), Alibaba, Meituan (3690.HK) and Tujia.

It seems somewhat unusual for regulators to go after the smaller players who were likely victims of Trip.com’s anti-competitive behavior. As the old Chinese saying goes, we guess they tried to kill the monkey to scare the pigeons, but the pigeons didn’t get scared enough. Perhaps the monkey wasn’t completely dead either.

The only sense we can make of this, aligning with ongoing coverage of China’s regulatory crackdowns, is that this is a broader play by the Chinese government to eliminate practices that keep Chinese consumers from spending more money. The anticipated post-Covid consumption rebound never quite materialized. We’re now looking at almost four years of weak private consumption. Out of survival instincts, these smaller platforms may have resorted to practices that the government believes are detrimental to economic development. Will regulators return to cracking down on e-commerce, music or takeout delivery? Political logic isn’t always straightforward. This might just be a devious way to remind Trip.com and others to behave. But on a macro level, as long as domestic consumption doesn’t return to a firm growth trajectory, we believe the government will remain incredibly nervous and cautious. For investors and companies alike, this antitrust narrative is proving to be a never-ending story.

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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