China’s largest property listings website, Beike, is attempting a $1 billion IPO on the New York Stock Exchange despite signs that stock markets are becoming part of growing tensions between the US and mainland China.
On July 24, KE Holdings Inc (BEKE), a Chinese online property brokerage backed by SoftBank Group Corp, submitted its prospectus to the US Securities and Exchange Commission, aiming for what would be the largest US listing of a Chinese company in more than two years.
The initial public offering application comes as a number of Chinese companies are retreating from US markets in favour of listings in Hong Kong or on mainland exchanges with the US senate having passed a bill in May that could ban many Chinese companies from listing shares in the country.
Leveraging China’s Boom
“We have more than 18 years of operating experience through Lianjia since our inception in 2001, Beike founder and chairman Zuo Hui said in an open letter to investors, “Such extensive industry experience has provided us with distinct insights into markets, business conditions and customer needs, which we believe are critical for us to offer effective and practical solutions.”
The Zillow-like real estate platform commenced operations in 2001 through Beijing Lianjia, a Beijing-based real estate brokerage which operates over 42,000 agency locations across 103 mainland cities.
Beike recorded 2.2 million transactions and about 39 million mobile monthly active users in 2019, allowing it to handle a gross transaction value of about RMB 2.1 trillion ($300 billion).
Goldman Sachs, J.P. Morgan, Morgan Stanley and China Renaissance are acting as underwriters for the listing, according to the prospectus. In March 2020, Beike was reported to have raised $2.4 billion in a Series D+ round from investors including SoftBank, Tencent, Hillhouse Capital, and Sequoia Capital China.
The investment banking giants are betting that Beike’s role in facilitating China’s housing market, which reached RMB 22.3 trillion in value in 2019, according to a report by mainland sovereign wealth fund CIC, will attract share shoppers to the offering. Mainland home sales are expected to grow at a compound annual growth rate of 6.6 percent to reach RMB 30.7 trillion in value by 2024.
Fraud Cases Shock Investors
Beike’s US IPO application comes at a turbulent time, after financial fraud allegations rocked three Chinese companies listed in the US earlier this year.
In April, NASDAQ-listed Luckin Coffee was found to have fabricated $310 million in sales, a fraud which triggered its delisting from the US exchange. Days later, NYSE-listed TAL Education Group lost 18 percent of its value after the tutoring marketplace also admitted fraudulent sales.
During that same week short-sellers Muddy Waters and Wolfpack accused NASDAQ-listed video-streaming site iQiyi of fraud, a claim that the Baidu-spinoff has denied.
Earlier this year, loss-making mainland apartment rental platforms, Qingke and Danke, both of which are listed in the US, were investigated by local governments in China after coming under fire from tenants and landlords.
Those scandals have led some investors to question Beike’s listing plan under the current environment. Brock Silvers, CIO of Adamas Asset Management in Hong Kong, points to financial considerations as a possible rationale for choosing a US exchange.
“There’s no question that Beijing now prefers for Chinese companies to seek local listings, but that influence can vary from case to case,” Silvers told Mingtiandi. “Not all companies are ready to preemptively leave US capital markets. Founders will also likely remain intrigued by the ability to move significant personal wealth overseas.”
While Beike’s current investors may prefer a US listing, Silvers pointed out that current conditions are creating headwinds for the $1 billion deal. “Given the recent problems are Danke and Qingke, as well as the rapidly deteriorating US-Sino bilateral relationship, a Beike IPO in the US this year is far from assured,” he said.
US-China Tensions Spill into Stock Markets
With the accounting scandals helping to stoke cross border tensions and raise investor concerns over financial transparency, the US Senate on 20 May passed the Holding Foreign Companies Accountable Act, which requires certain issuers of securities to establish that they are not owned or controlled by a foreign government. The bill has yet to come to a vote in the House of Representatives.
Even before the US government began voting on new restrictions, a number of US-listed Chinese companies had opted for secondary listings in Hong Kong.
Gaming company NetEase and e-commerce giant JD.com, both NASDAQ-listed, chose to debut in Hong Kong last month, with NetEase raising $2.7 billion and JD raising $3.9 billion in the second-largest IPO of the year so far.
Beijing’s Financial Supervision and Administration, which licenses commercial operations, announced late last month that it will analyze Chinese companies listed in the US and support companies seeking to return home to Hong Kong or mainland China exchanges, according to local media reports.
Bracing for Risk
In its prospectus, Ke Holdings focused on market risks over political concerns.
“Our business is susceptible to fluctuations in China’s residential real estate market and is subject to government regulations,” the company said in its prospectus.
During 2020 the mainland housing market has gone from a COVID-19 shutdown which wiped out most of the first quarter to an easy credit boom which has seen home sales and land tenders jump in recent months.
The Housing and Construction Bureau in Shenzhen earlier this month announced a set of new home purchase restrictions designed to cool down the market after home sales in the city jumped 41 percent in the first half of 2020.
Those cooling measures came after Beike’s revenue for the first quarter of 2020 fell to RMB 7.1 billion — a 12.7 percent drop from the same period last year as lockdowns kept home buyers indoors