IPOs: iQiyi, Bilibili Juice Up Fund-Raising Targets

Bottom line: iQiyi and Bilibili should price near the top of their higher IPO price ranges, as each benefits from strong investor sentiment fueled by their unique offerings and a potential new plan to concurrently list their shares in China. 

Anyone who was worried that a regulatory crackdown on fintechs late last year might dampen broader enthusiasm for Chinese stocks can relax. That’s my key takeaway from the latest headlines, which show that two non-fintech Internet firms are experiencing stronger-than-expected demand for their upcoming listings in New York.

Leading that charge is Baidu-backed (Nasdaq: BIDU) online video site iQiyi, which has sharply jacked up the fund-raising target for its proposed New York listing by a massive 80 percent, in what could well be the biggest such listing by a Chinese firm this year. At the same time, the smaller but similarly high-profile Bilibili has jacked up its own fund-raising target by a hefty 50 percent.

So what’s going on here, and why did these companies so poorly misjudge original demand for their IPOs? My best guess is that recent headlines saying China is considering a plan to lure its overseas-listed high-tech champions to make secondary listings at home could be largely behind the shift in sentiment.

I wrote about that particular news last week. But to recap, the new plan would allow US-listed Chinese firms to make secondary listings at home using a new breed of China Depositary Receipts (CDRs), similar to the popular US American Depositary Receipt (ADR) program. (English article)  That talk could be getting US investors jazzed that Chinese companies like Alibaba (NYSE: BABA) and Baidu, which are now traded in New York, could soon get significantly higher valuations from bullish Chinese investors buying CDRs.

We’ll return to that shortly, but first let’s review the headlines that come via updated prospectuses filed by both iQiyi and Bilibili on Friday. The first of those shows that iQiyi now plans to raise up to $2.7 billion from its IPO, a sharp boost from its earlier target of up to $1.5 billion. (Chinese article) The second has Bilibili raising its own target to as much as $600 million, versus an earlier target of $400 million. (Chinese article)

The companies amended their proposals based on new price ranges for their soon-to-be issued shares, with iQiyi now quoting a top end of its range at $2.71 per share. Bilibili, famous for its unusual feature that lets viewers comment on movies and TV shows with printed on-screen text, has set its upper limit at $12.50 per share.

Known Risk

These two companies both come from the video space, which is risky on the one hand due to fickle Chinese censors, but whose risks are also quite well-known since most such sites have nearly a decade of operating history. That’s quite a contrast from the fintechs, most of which have three years of operating history or less and could be subject to more aggressive crackdowns as China’s financial regulator tries to rein in the risks that such groups pose to the country’s financial system.

Both iQiyi and Bilibili also have the distinction of being somewhat “first-in-class” offerings, with a few caveats. iQiyi will become the only major video site with a separate listing, among a group of money-losing companies with big potential as they challenge older traditional broadcasters. Youku Tudou previously had that distinction, but was bought out and privatized from New York by current owner Alibaba a few years ago. Meantime, Bilibili is also somewhat unique because of the on-screen comments that are its trademark feature, even though the company currently makes most of its money from online games.

The strong showing for both IPOs comes amid a concurrent wave of bullishness for US-listed Chinese tech stocks in general, with IPO activity getting off to a strong start this year in terms of number of applicants. One of the few that has actually listed so far this year, smart watch maker Huami (NYSE: HMI) doesn’t look all that impressive, and is actually trading slightly below the offering price from its IPO last month.

But I would probably put Huami in the exception column, since the company makes low-end smart watches and isn’t a particular leader in its field. By comparison, many of the companies coming to market, like iQiyi and Bilibili, do have more unique functions and are leaders in their areas. Accordingly, I expect both offerings will price near the top of their range, and perhaps even get a slightly lift on their debuts despite valuations that some might consider a bit lofty.