Special purpose acquisition companies, or SPACs, are now eyeing the Asian market for merger deals as they compete to finalize deals before their initial public offerings (IPOs) expire.
SPACs, also known as blank-check companies, have become a popular vehicle on the U.S. market for taking private companies public. SPACs generally operate by raising money through an IPO and then entering into a business combination with a company with existing operations, often through a reverse merger.
The New York Stock Exchange said it no longer plans to delist three Chinese telecommunications giants, reversing a decision announced four days earlier. The NYSE said late Monday it dropped the plans after “further consultation with relevant regulatory authorities in connection with Office of Foreign Assets Control.”
Over the past decade, U.S. investors have increased their exposure to companies based in or with the majority of their operations in China (“China-based Issuers”). China, while often viewed from an investing perspective as an emerging market, is the world’s second largest economy and, through direct investment as well as index-based investing, U.S. investors have increased their exposure to China-based Issuers over the past decade.
How China’s New Regulations Impact Chinese Education Stocks
July 28, 2021
Many Chinese stocks in the education sector, especially for those in the field of K9 (the compulsory education in China doesn’t include high school), have seen their profitability, market performance, and attractiveness for capital declined this year due to the tightening policy. Chinese stocks have experienced various degrees of decline during the first half of this year due mainly to the influence of HFCA Act; however, the education industry in China has been subject to the most stringent regulation and restrictions, which has caused high volatility in the market. Compared with the beginning of the year 2021, the total market value of the Chinese education stocks has evaporated by more than $100 billion already.
Ever Since New Oriental (NYSE: EDU) listed on the United Sates in 2006, the road of raising capital for China's education industry became lucrative. The off-campus tutorial industry for K9 had experienced overheated financing and massive expansion in the past few years. In the last year, the online education industry rose as the market seized another opportunity during the pandemic time. Although the overall valuation for China’s education industry soared, a series of problems within the market gradually emerged. Nevertheless, many offline tutorial institutions were hit during the pandemic due to the shortage of cash flow. Some of them are still facing such problem even today since they are unable to reinstate their offline classes. The fierce advertising campaign and market expansion derailed the essence of education and confused many parents who want to purchase tutorial programs for their children. The closure of many small and medium traditional tutorial institutions that were unable to sustain their operations has also brought huge losses to those parents. The marketing campaigns of these institutions are good at fearmongering, urging parents to buy the products so that their children will be able to catch up with the competition. At the moment when the Chinese government is actively promoting the three-child policy, the excess expansion of those education industries will undoubtedly add financial burdens to parents and ultimately alter their fertility intention.
Xinhua News Agency, the official Chinese state media, commented that the unregulated capital expansion was driven by the utilitarianism of education and the pursuit of short-term high profitability, which has created group anxiety on parents; as the result, only the capital itself, rather than students and their parents, will ultimately benefit, and the involution of education industry will inevitably occur. Such comment somehow reflects the government’s resolution to strengthen the regulation of the education market. “Opinions on Further Easing the Burden of Students' Homework and Off-Campus Tutorial Programs in Compulsory Education” (“Double Easiness” in short) was passed during the meeting of Central Comprehensively Deepening Reforms Commission in May 2021. Since the specific details of the policy were not announced at that time, many speculations arose in the market. On May 24, 2021, a rumor went viral on Chinese social media sites: a series of provisions of “Double Easiness” was disclosed, including off-campus tutorial institutions shall not offer courses during holidays, tutorial institutions whose major business is academic education or quality education shall not be allowed to go public, and tutorial institutions shall not advertise themselves. Although this rumor was not confirmed back then, it caused quite a stir in the market as many Chinese education stocks fell by 10% to 30% on that day, which means that the uncertainty of the new education policy increased the risk of holding those stocks. On June 15, the Ministry of Education officially announced the establishment of a new department for supervising the off-campus tutorial institutions. One day later, the Ministry of Education issued a warning message regarding the risks of false propaganda related to the off-campus tutorial institutions. After the detailed information of “Double Easiness” was revealed on July 24, 2021, the pervious rumor was officially confirmed. The policy also emphasizes that all existing academic tutorial institutions must be registered as non-profit institutions, and the capitalization events are strictly prohibited. Many Chinese education stocks plummeted in response to the announcement. TAL Education Group (NYSE: TAL) fell by 70.7%, New Oriental (NYSE: EDU) fell by 54.2%, and Gaotu (NYSE: GOTU) fell by 63.3%, indicating their largest single-day drop in the history. Currently, non-academic tutorial institutions and pre-school education institutions have not been affected by the new policy.
More than 120 tutorial institutions, led by The China Association for Non-Government Education, jointly announced that they fully understood the new policy and will uphold the government’s decision. Such policy has generated a huge impact on the listed tutorial institutions, which means that these institutions may either choose to delist or spin off their academic tutorial facilities from their assets. Jianzhi Education Group just filled the SEC Form F-1 on July 23, 2021. Although this company’s main business is higher education and will not be affected by the “Double Easiness”, the panic in the market has been formed already, which will definitely affect the company’s listing process.
Erli Wang, Research Analyst
Summary of Chinese IPOs on the U.S. Exchanges in the First Half of 2021
July 19, 2021
The stock market has been very exciting during the first half of the year 2021, and certain well-known events such as the outbreak of meme stocks and the collapse of Archegos Capital Management have subverted the way people perceive the market. Although the stock market has been constantly fluctuating and full of uncertainties, the overall trend tends to be bullish. The S&P 500 Index rose 14.41% in the first half of 2021, which outperformed the index’s average annual growth rate of 11% over the past twenty years. The NASDAQ Composite Index and the Dow Jones Index rose 12.54% and 12.73% respectively during the same period. Also, the surging waves of IPOs in the U.S. market have also broken many historical records, especially the U.S. listed Chinese companies.
According to the report released by KPMG, the overall position of the global IPO market for the first half of 2021 was quite robust. The total number of IPOs during that period was 1,047, and the total amount of funds raised reached US$210 billion excluding SPACs, a year-over-year increase of 134% and 196% respectively. Information technology, media and telecommunication sectors have continued to serve as the main driving forces of the global IPO market led by stock exchanges located in the United States, Hong Kong and mainland China as they accounted for 62.24% of the global total fundraising performance. As the global market gradually eases from the Covid-19 epidemic, the global economy has continued to recover, driving an increased external demand.
In the first half of 2021, a total of 37 Chinese IPO companies have completed their initial public offering in the United States, an increase of 18 compared with the same period last year; in addition, this half year record has even surpassed the total of 34 Chinese IPOs in 2020. Of these, 13 companies were listed on the New York Exchange and 24 companies were listed on the NASDAQ. The total amount of funds raised by these Chinese companies was around $13.8 billion while four of them raised more than $1 billion. Such achievement has also exceeded the full year record of $12.26 billion in 2020. In terms of the main range of financing, more than half of these companies raised between $10 million and $50 million. Most of these companies are in the consumer goods sectors and the non-consumer goods sectors, followed by the information technology sector and the healthcare sector. As of June 30, 2021, the total market capitalization of these 37 companies reached $184.92 billion. Based on the statistics done by Dealogic, the issuers in the U.S. stock market raised more than $171 billion through IPOs In the past six months of this year, and this number exceeded the record of $168 billion for the entire year of 2020. In addition, in the first half of this year, the average single day increase of the newly issued stocks was 40.5% in the U.S. market, compared with 28.2% in 2020 and 21.7% in 2019. The average weekly rate of return in the first half 2021 was 35.7% in the U.S. market, compared with 32.2% in 2020 and 25.5% in 2019. The Chinese stocks listed in the U.S. market were sought after by many investors too. For the first half of this year, among the top 10 newly issued stocks with price increases, 7 of them belonged to Chinese issuers while the remaining 3 were from U.S. issuers. The highest closing gain on the first day of IPO reached 881.82%, which was accomplished by E-Home Household Service (NASDAQ:EJH), a Chinese company that operates the business of appliance repair and maintenance.
The listing of Didi Global (NYS: DIDI) on the New York Stock Exchange at the end of last month marked the last IPO deal of Chinese companies for the first half of 2021. The company has become the second largest publicly listed Chinese stock after Alibaba in terms of the deal amount raised of $4.44 billion. It has been hurt by the Chinese regulatory inquiries and the market forces. Full Truck Alliance (NYSE: YMM) raised $1.6 billion, which was the second largest deal for the first half year, followed by RLX Technology (NYSE: RLX), which raised $14 billion.
2021 will be a harvest year for IPOs if the current market trends continue. At present, more than 25 Chinese companies have submitted their registration statements to the SEC and plan to go public within 2021. The increased regulatory pressure on Chinese high-tech companies has given an uncertainty to owning Chinese stocks, and the issuance of Holding Foreign Companies Accountable Act (HFCA Act) has elevated the difficulty for Chinese companies to go public in the United States. In addition, favorable policies have added to the enthusiasm for Chinese companies to move to Hong Kong for relisting or dual listing. As of June 30, 2021, a total of 5 U.S.-listed Chinese companies have been listed on the Hong Kong Exchanges. For those reasons, Chinese companies planning to go public in the United States will face new challenges which should be taken into consideration by investors.
Erli Wang, Research Analyst
China Prohibits Their Banks Use of Cryptocurrency
June 22, 2021
Early this week, the People’s Bank of China, which is China’s central bank, held a meeting with representatives from many domestic financial institutions in China, including state-owned commercial banks and Ant Group. Those institutions were asked to continue to strictly abide by "Notice on Preventing Bitcoin Risks" and "Announcement on Preventing Financing Risks Related to Cryptocurrency Issuance" released in May. In addition, the People’s Bank of China issued a new guidance called “Announcement on Prohibiting the Use of Our Bank’s Services for Cryptocurrency Transactions”. After that, many banks and payment facilities issued their own announcements prohibiting the use of banking services for cryptocurrency transactions.
With the introduction of new regulations related to cryptocurrency by the Chinese government, the currency once again suffered from a frantic sell-off. The Bitcoin price declined to a two-week low on Monday, falling as much as 11.4% to $31,735. The entire sector of blockchain technology in the US stock market also collapsed on the same day mainly driven by Coinbase (NASDAQ: COIN), Riot Blockchain (NASDAQ: RIOT), and Marathon Digital Holdings (NASDAQ: MARA). Ari Wald, head of technical analysis at Oppenheimer, said that the current decline in the Bitcoin prices would cause a negative impact on the overall trend. Its average price in the past 50 days was below the 200-day moving average. This indicator is what a trader should pay close attention to, suggesting that the later trend could become worse.
Back on April 30, 2014, Bank of China announced its first statement prohibiting the use of its services to trade Bitcoin amid the currency’s downturn. Although all crypto trading platforms operated in China had been ordered to cease their operations by September 30, 2017, businesses involving Bitcoin mining have not been expressly prohibited by the authorities. On June 20, 2021, all crypto mining facilities in Sichuan province were forced to shut down as the government worried that mining will have a negative impact on the environment. Due to the tight electricity supply in China this year, it is not surprising that the cryptocurrency mining activities in Inner Mongolia and Xinjiang have been suspended, not to mention the concern for environmental pollution caused by thermal power. But recently, the ban has reached Sichuan, the location where contains rich water resources and mainly uses clean energy for power generation. Sichuan is said to be among the largest Bitcoin mining pools in China and even the world, with approximately 8 million uploads of computing power used for cryptocurrency mining. According to data from http://btc.com, the current average computing power of the entire Bitcoin network is 126.83 EH/s, which is nearly 36% lower than the historical high of 197.61 EH/s on May 13, 2021. At the same time, the computing power of Bitcoin mining pools with Chinese background such as Huobi Pool, Binance, Ant Pool, and Mining Pool has declined significantly, and the decrease in computing power on June 21, 2021 for the aforementioned companies were 36.64%, 25.58%, 22.17% and 8.05% respectively.
Erli Wang, Research Analyst