FUND RAISING: Bubble Crests With Guotai IPO, Zhubajie Mega-Funding
Bottom line: A record IPO by Guotai Junan and massive private fund raising by a relatively unknown website reflect the overheated state of China’s capital markets, and could reflect a cresting of the current stock market rallies.
With China’s stock market posting 2 consecutive days of large losses, everyone is starting to guess whether the current stock market rally may have finally crested and a period of correction begun. Two of the latest fund-raising headlines show just how frothy and ambitious activity has become, led by a plan for China’s biggest IPO in 5 years from securities brokerage Guotai Junan. The other headline comes in the venture funding space, where Zhubajie, a relatively unknown company in the hot crowdsourcing sector, has just landed an impressive 2.6 billion yuan ($420 million) in new funding.
I’m far too cautious to predict that China’s recent stock market rally is about to end, starting a much needed correction after a run-up that has seen the main Shanghai index more than double over the last year. But I do believe the correction will come by the end of this year, and possibly much sooner. When that happens, we’ll almost certainly see a sudden end to the flood of IPOs now hitting the markets in Shanghai and Shenzhen. New mega-fundings like the one for Zhubajie are also almost certain to end or slow sharply.
All that said, let’s look at Guotai Junan’s new IPO plan, which has the brokerage filing to raise up to 30 billion yuan, or nearly $5 billion, through a listing in Shanghai (English article) The target would make the IPO the largest in China since 2010, marking a new height in the fund-raising frenzy that has accompanied a current bull market where most new offerings have soared on their trading debuts.
Guotai Junan is China’s largest brokerage by revenue, and is just the latest in string of Chinese stock brokers to raise big money during the current rally. Most of the brokers are raking in huge profits from the rally, since they derive a big portion of their revenue from trading activity. Of course those huge profits will suddenly evaporate once the correction begins and trading returns to more normal levels, though nobody seems to care about that at the moment.
Next there’s Zhubajie, whose latest $420 million fund raising looks quite impressive when one considers that the company raised just $11 million combined in its first 2 fund-raising rounds. (English article; Chinese article) The company actually has a relatively long history dating back to 2006, though I suspect it only entered its current business later with the recently rise in popularity for crowdsourcing.
The reports contain lots of metrics on Zhubajie’s size, including its user base of 13 million and combined transaction volume of 6.4 billion yuan over an unspecified time frame. The lack of actual revenue and profit figures indicates the company may still be quite small, perhaps with less than $100 million in annual revenue and zero profits. That would make the big capital-raising figure that much more surprising.
The company’s early investors include IDG, which is one of China’s most successful venture capital investors in the tech sector. But the investors in this latest mega-funding are both big Chinese companies, which are usually far less sophisticated and also flush with cash from the recent stock market rally.
The Zhubajie deal is by no means the largest in the current flood of major private equity fund-raising. Group buying sites Dianping and Meituan and smartphone sensation Xiaomi all raised bigger sums in the last 6 months, and leading taxi app operator Didi Kuaidi is in the process of raising $1.5 billion. (previous post) But the fact that such a small and relatively unknown company can raise such big money is quite revealing, and reflects the overabundance of cash chasing investments in China right now.
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