Chinese tech unicorns are stampeding toward the public markets: If the valuations touted by bankers are to be believed, companies worth an eye-popping half a trillion dollars are now planning initial public offerings this year. Investors should be wary of getting crushed.
The latest company to join the queue is China’s ride-hailing answer to Uber, Didi Chuxing, which could list with a market cap of $70 billion to $80 billion, according to people familiar with the situation. Other IPO candidates include Tencent Music, estimated to be worth $25 billion, handset maker Xiaomi, valued at $100 billion, and the daddy of them all, Ant Financial, the Alibaba affiliate said to be worth $150 billion. The list goes on.
Valuation inflation is clearly rampant already. Didi was valued at $56 billion at its last funding round late last year, yet now seems to be worth up to roughly 40% more. Ant’s latest whopping expected market cap is more than twice its $60 billion valuation two years ago. Such heroic leaps are coming despite little public evidence of improved business performance, and against the backdrop of sharp price falls for global tech stocks like Facebook and Tencent this year.
The ever-higher valuations also suggest these Chinese unicorns will be able to follow the tech sector’s time-honored approach: Sign up users first, grab a strong market position and worry about profits later. The profits bit, though, isn’t a sure thing, and assumes market conditions will remain static.
Didi, for example, now has a de facto monopoly in China’s ride-hailing market after driving out Uber in 2016. But the recent entry of Meituan-Dianping—itself planning an IPO that could reportedly value it at $60 billion—risks reigniting a cash-burning battle for pre-eminence. Ant is another apparently unassailable company, whose dominance of Chinese online payments is in fact coming under heavy pressure from Tencent-backed rival Tenpay.
Sure, all of these tech firms are household names—a factor that could help them pull off their massive IPOs. The risk of market indigestion is high, however. Even if the likes of Ant, Didi and others issue only 20% of their shares, they could be raising almost $100 billion this year; global IPO volume last year was only $198 billion, according to Dealogic. As Chinese tech IPO fever ramps up this summer, investors should try to keep a clear head.
Write to Jacky Wong at JACKY.WONG@wsj.com