China-U.S. IPO Pipeline Creaks Back To Life With Two New Listing Plans

Key takeaways:

• Two Chinese companies, drug maker LianBio and hotel operator Autour, are moving ahead with U.S. IPOs after a three-month pause on such listings
• Neither company is using the controversial VIE structure, and neither comes from the sensitive internet sector

By Doug Young

A year ago, the imminent IPO by Chinese company LianBio LIAN wouldn’t have drawn much attention.

The biotech specialist’s offering is noteworthy for its large size, aiming to raise $345 million. But in the broadest terms, the company is just one of dozens of revenue-less, loss-making Chinese drug startups to publicly list in New York and Hong Kong over the last five years.

But these are no ordinary times. Those who follow this space will recall that U.S. IPOs by Chinese companies ground to a halt in July shortly after the listing by the Uber-like DiDi Global DIDI.

That listing attracted the wrath of China’s internet regulator, which said DiDi had failed to complete a mandatory review under the country’s year-old data security law before the IPO. That clash cast a cloud over the pipeline of other Chinese companies lining to list up in the U.S. at that time, since most also possessed big amounts of user data that might be subject to a review.

Then in late July the U.S. securities regulator effectively shut off the flow completely by temporarily suspending all new IPOs by Chinese companies. The Securities and Exchange Commission (SEC) took that step over concerns about risks associated with a corporate structure that most Chinese companies listing in the U.S. were using called a variable interest entity (VIE).

More broadly, the SEC also seemed to be saying it was time to pause such listings and re-evaluate how those Chinese companies discuss their unique risks for investors – mostly related to China’s unpredictable regulation – in their IPO prospectuses. Such risks were always included in past Chinese IPO prospectuses, but often in very general terms at the bottom of the “risk” section.

Now it appears that after the pause of about three months, the flow may be starting to resume. In fact, there are at least two Chinese IPOs now in the pipeline. LianBio is the newest, first filing a prospectus on Oct. 1, followed by eight more filings, including its latest updated version last Friday. 

The other is from Atour Lifestyle Holdings Ltd. (ATAT.US), an operator of higher-end hotels with a strong in-room shopping element. Unlike LianBio, Atour made its first public IPO filing in June, before all the controversy erupted. Its listing plan then went silent from mid-July until the end of August during the height of the noise. Since then it has filed two updated prospectuses, including the latest on Sept. 20.

Atour’s IPO is also quite ambitious, aiming to raise up to $350 million. Both Atour and LianBio have set price ranges for their listings, which usually means an actual trading debut should be near. But in this case, we should note that more than a month has now passed with no new filings from Atour.

Both of these new offerings are most notable for the fact that neither is using the VIE structure. LianBio specifically notes that it is not using the structure in its prospectus, while Atour’s prospectus contains no mention of the term. Both companies are offering American depositary shares (ADSs), continuing a practice used by most Chinese companies.

Risk, Risk, Risk

We’ll look very quickly at the actual businesses of LianBio and Atour at the end of this review, though in this unusual case, that element is less-significant. Instead, the most-significant element is that these listings are coming to market after the earlier controversy, which seems to signal we could see more Chinese listings resume soon.

One interesting point to watch will be whether future listings abandon their VIE structures, which has been a big point of contention from both U.S. and Chinese regulators. The structure was originally aimed at skirting Chinese rules that forbid foreign ownership of internet companies, since the VIE structure allows U.S. shareholders to own profits from the listed companies without actually owning any of their assets.

One place where we can expect big changes is in the “risk” section of Chinese companies going forward. That new reality was most evident in LianBio’s prospectus, whose “risk” section occupied 87 of its 302 pages – or nearly a third of the report.

What’s more, the big China-related risks were all the beginning of LianBio’s “risk” section, unlike past IPO prospectuses where such risks were often vague and buried at the bottom of the section. LianBio’s risk section was led off by high-profile risks related to changes in China’s economic policies, the potential for Chinese government interference in its operations, friction in U.S.-China relations, and risks related to compliance with the data security law.

By comparison, Atour’s “risk” section looked more like the old-style prospectuses, with most of those risks in the lower part of the section. Atour’s latest prospectus was notable for the addition of a section on the data security law, which wasn’t included in the original prospectus from June.

All that said, we’ll wind down with some quick financials for anyone who might be interested in buying into these two offerings despite all their risks.

LianBio is the usual revenue-less drug startup, licensing drugs from western companies to develop for the China market. The company was only incorporated in mid-2019, and reported a $162 million net loss in the first six months of this year versus a $6.6 million loss a year earlier. It has nine drugs in its pipeline for treatment of conditions including cardiovascular and inflammatory diseases, as well as cancer.

Atour’s financials look a bit more mature. The company operates 654 hotels, most of those managed by Atour under contracts with third-party owners. Like many travel-related companies, it suffered in the first half of the last year during the height of the pandemic, but has rebounded sharply since then.

Its revenue rose 83% in the first half of this year from the year-ago period to 990 million yuan ($155 million). It also returned to the black in the first half of the year with a 70.7 million yuan profit, reversing a 102.5 million yuan loss in the year-ago period.