May 18, 2020

Breakingviews: Delivery app dares Shanghai-to-New York IPO route

by Breakingviews.

Getting from Shanghai to lower Manhattan has become more treacherous, and not just because of the virus. Chinese companies seeking to raise capital on New York exchanges face an intensifying U.S. political backlash while the Luckin Coffee scandal renews fears about the quality of the country’s financial statements. The willingness of JD.com-controlled delivery app Dada Nexus to take this risky journey suggests the alternatives are even less appealing.

Founded in 2014 by former Oracle executive Kuai Jiaqi, Dada Nexus works with supermarkets to deliver their goods using crowd-sourced riders and helps offline merchants with e-commerce. Customers stuck at home during the pandemic helped the unprofitable company nearly double first-quarter sales to 1.1 billion yuan ($155 million) from a year earlier. Blue-chip backers include U.S. retailer Walmart and venture capital firm Sequoia Capital China.

Even so, Dada’s decision to seek $500 million in a Nasdaq initial public offering takes a certain amount of courage. Legislation that would delist Chinese companies unless their auditors comply fully with domestic accounting oversight could gain fresh traction after a giant U.S. government-worker pension fund this week decided not to invest in the country’s equities.

For portfolio managers, the returns also don’t obviously justify the risk. Chinese companies that listed in New York last year have collectively lost more than a quarter of their market value, according to Dealogic. Ones that made their debut in Hong Kong are up 37% and mainland issuers have gained 157%.

Dada Nexus is following a dozen other Chinese companies to New York this year. That’s the most on record at Dealogic, and it’s only May. The Hong Kong bourse and China’s fledgling STAR board have taken steps such as easier profitability requirements and application processes to attract local startups, but neither has been able to completely overcome the Big Apple’s attractions. They include deeper pools of capital from sophisticated investors who trade in greater volumes.

And for now, those fund bosses seem all too willing to heavily discount both President Donald Trump’s anti-China rhetoric and the Luckin debacle. Beijing-based Kingsoft Cloud upsized its U.S. stock sale last week and the shares popped over 25% on their first day of trading. That suggests Dada may have selected the best IPO route.

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