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What happens when IPOs are cancelled

James Gard  |  25 Nov 2020Text size  Decrease  Increase  |  
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Global investors were braced for the blockbuster flotation of Ant Group which at a $34 billion valuation would have made it the biggest IPO on record, eclipsing Saudi Aramco in 2019. But at the 11th hour, the float was pulled following intervention from the Chinese government.

A record-breaking float in the middle of the global pandemic might seem at odds with economic reality, but it did underline how much quicker Asia-Pacific has recovered from the crisis. The decision by Ant Group to float in China rather than New York was seen as a litmus test of increasing confidence in local capital markets. China has been one of the best performing stock markets this year so it’s not surprising to see some investor exuberance in the region.

While Ant’s decision to withdraw its flotation isn’t unique – WeWork caused a stir when it pulled its IPO in 2019 – it is rare for such a high-profile name to do this. Floats get pulled for various reasons, such as lack of investor interest and/or mis-priced shares, but there are factors specific to the Chinese market to make Ant an unusual case.

MORE ON THIS TOPIC: 11 big things: the strange world of WeWork

But Ant's aborted IPO will probably not dim investor appetite for blockbuster listings: travel website Airbnb has just announced it plans to float.

Beijing intervenes

Ant’s official statement to the stock exchange talked about “the recent changes in the Fintech regulatory environment”. In essence, the Chinese authorities have tightened up rules on how financial and technology companies are regulated, requiring them to hold more capital reserves. Ant fell into both categories: formerly known as “Ant Financial”, Ant Group was spun out of China tech Alibaba (BABA) and owns the country’s largest digital payment platform Alipay. Just after the announcement about the aborted IPO, the Chinese government introduced strict new guidelines for how companies such as Alibaba and Tencent operate.

“We believe this could be a strong signal of a regulatory tightening,” says Morningstar analyst Dan Baker.

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Analysts are currently updating their rating for Ant in the light of these developments. But Morningstar’s Iris Tan says the increased capital requirements placed on Ant by the regulators could have a negative impact on valuation. She adds that these changes mean that Ant’s lending division could be valued more like a bank than a high-growth tech company. In the current global investing environment, tech stocks are much in-demand, but banks are not.

What happens next?

Ant’s IPO is only suspended rather than cancelled outright, so it could come back to public markets again after the recent regulations become clearer, Morningstar analysts say.

Should investors be wary second time around? IG’s chief market analyst Chris Beauchamp says it’s a useful reminder of the political risks of investing in emerging markets, especially China. He says that some of the momentum goes out of a company once a float is pulled and it tends to affect investor perception of its prospects.

Still, even after WeWork’s much-publicised fall from grace – it planned to go to market with a $50 billion valuation – the company could still make it as a listed entity. Beauchamp thinks the changed working conditions brought about this year could strengthen the case for WeWork’s business model of flexible office space. 

IPOs are like buses

Stock markets are forward-looking (and investors have short memories) so there are always plenty of new names in the pipeline to maintain interest in IPOs. Prospects for next year include Deliveroo, Airbnb, JustEat rival DoorDash, retail trading app Robinhood, and US grocery delivery company Instacart. Rising markets mean early backers of these companies such as venture capital firms get a higher return on their investments when they list.

Morningstar has just started coverage of travel disruptor Airbnb, which recently filed its intention to float, ending a long period of speculation about its plans to go public. Analyst Dan Wasiolek says the hotel disruptor benefits from a strong "network effect", which is when a company expands the more users it has (think Facebook and Amazon). Airbnb has also benefited from the "staycation" trend, especially in the US, where travellers have shunned international trips in favour of upmarket domestic stays. And Wasiolek adds that, with fears of travel firms going bust in the pandemic, Airbnb is in a strong enough financial position to see it through many years of low growth.

For retail investors, the chance of being in at the beginning of the next Apple, Amazon or Tesla is sometimes too hard to resist. It’s still important to do your research, IG’s Beauchamp says: “An IPO is like any other kind of investment, you judge it on its merits, even more so when you're listing at a premium and you’re going in when everyone is getting out.”

is senior editor for Morningstar.co.uk

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