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Tencent-backed DouYu sees shares sink: The end for Chinese IPOs on Wall Street?

DouYu International’s [DOYU] Wall Street debut comes at a time when Chinese investment and IPO filings in the US are in decline, indicating just how frosty relations are becoming between the two nations. 

Similar to Amazon’s [AMZN] Twitch service, DouYu is one of China’s largest esports live-streaming platforms, backed by Tencent [TCEHY] which owns 37% of outstanding shares through its subsidiary Nectarine. It has been one of the region’s most favoured startups and seen tremendous growth since it was founded in 2013.

37%

Percentage of outstanding shares owned by Tencent

But despite crossing the billion-dollar valuation mark in 2017 and its popularity among gamers – the company boasts of 153 million monthly active users and had revenues of $531.5m in 2018 – DouYu’s 17 July listing on the Nasdaq was muted. 

The company raised $775m through the share sale, opening at $11.02 – the largest IPO by a Chinese firm in the US so far this year according to Refinitiv – but closed the day largely unchanged at $11.50. 

Since then, it has been on a downward journey, seeing its price fall more than 12% from its opening to 26 July, giving it a valuation of $3.27bn. Volume has also fallen significantly during the same time, dropping by roughly 94% to just 2,082,900.

Tencent also has a 39.5% stake in domestic competitor Huya [HUYA], valued at $4.8bn. Both DouYu and Huya get most of their revenues from “gift” purchases and advertising, however, operating expenses are expected to increase as they look to expand their content.

 

Chinese IPOs in trouble 

Before the debut, DouYu had been considering selling shares on the Stock Exchange of Hong Kong. For years, this has been a common theme among Chinese firms looking to go public, as the mainland’s tough market regulations have proven difficult to operate in. 

However, DouYu’s decision to list on Wall Street wasn’t without headwinds. The company had originally filed for its IPO on 22 April, but postponed it following Trump’s threats to raise tariffs on Chinese goods in May. 

Due to uncertainty, DouYu sold shares at the lower end of its stated target of between $11.50 and $14.00. This could also be seen as a warning for other companies, such as Alibaba. When the ecommerce firm debuted in New York in 2014, it had been the biggest IPO of its time with a $25bn valuation. However, it is now reportedly considering a secondary listing in Hong Kong.

  

Market cap $3.25bn
Profit margin -15.68%
Quarterly Revenue Growth (YoY) 123.40%

DouYu share price vitals, Yahoo finance, 31 July 2019

 

“I think there will be more… companies looking to move back to Hong Kong because we really don’t know what the US will be doing,” Kevin Leung, executive director of investment strategy at Haitong International Securities, told CNBC. “I do see more dual listings coming back, especially when you look at Chinese companies, basically they do have a large chunk of their operations in China.”

 

Financial market reform 

Only 11 Chinese companies have gone public in the US so far this year compared to a record number last year, according to data from FactSet. The number of Chinese IPOs in the US had hit an eight-year high in 2018, as some 33 Chinese companies got listed on the New York Stock Exchange and Nasdaq, according to the Financial Times.

Analysts believe this downward trend could continue as regulations in China and Hong Kong improve. In an effort to drum up support for Shanghai’s tech industry, the Nasdaq-style tech board dubbed Star Market has just been launched.

11

Number of Chinese companies that have gone public in the US this year

Shares in Star rose 520% on its 22 July debut with the 25 companies listing rising 140% on average. Out of these 25 businesses, 24 were listing for the first time. The Shanghai Stock Exchange received 141 applications from companies keen to list on Star prior to the debut. 
 
For startups such as UBTech and Didi Chuxing who are rumoured to IPO soon, the benefits of listing on local markets – including more direct access through time differences and exchange rates – could mark a turning point for Chinese companies.

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