Chinese Securities Regulator Puts Lid On Hong Kong IPO Tea Party

Key Takeaways:

• China’s securities regulator has effectively halted new Hong Kong listings of Chinese bubble tea makers by suspending its approval of such IPOs, according to Reuters
• The move could signal a more aggressive approach by the CSRC in regulating which Chinese companies can list in Hong Kong and New York

By Doug Young

A recent tea party on the Hong Kong Stock Exchange appears to be over, at least for now.

That’s the decision coming from China’s securities regulator, which has decided to turn off the spigot of new listings by bubble tea makers in Hong Kong, according to a Reuters report last Friday, citing unnamed sources familiar with the situation. The China Securities Regulatory Commission (CSRC) made its decision based on the weak performance for bubble tea stocks this year, as well as weak market sentiment in general, Reuters said.

From our perspective, this particular development looks worrisome due to its implications for offshore listings by Chinese companies. China is notoriously protective of its domestic A-share markets in Shanghai and Shenzhen, often slowing or completely halting new listings when investor sentiment is weak.

In the latest sign of such intervention, the CSRC has become increasingly selective in the new listings it approves for Shanghai and Shenzhen, giving special preference to industries prioritized by Beijing such as semiconductors and new energy. That’s left other more mundane industries, mostly from the consumer sector, with little choice but to look overseas to raise funds through IPOs.

The CSRC rolled out a system last March requiring all Chinese companies to register with the regulator before making such offshore listings. But until now, such registration was mostly seen as a formality and China didn’t attempt to use the process to regulate the flow of listings to other markets. Now, that appears to be changing, in what some might see as China’s latest step to have more influence over Hong Kong’s largely market-oriented system.

We’ll return to the politics of this latest move shortly. But first we’ll take a closer look at the more direct consequences of the CSRC’s apparent moratorium on new bubble tea listings in Hong Kong.

The decision directly affects at least three companies that submitted applications for Hong Kong IPOs earlier this year, namely Mixue, Guming and Auntea Jenny, which all applied in January and February. Mixue and Guming are the largest players in China’s bubble tea sector, with 45,000 outlets between the pair of companies combined.

The sector has become quite overheated these days following a rapid buildup by Mixue, Guming, Auntea Jenny, Chabaidao (2555.HK) and others using a franchise system that allowed them to open new stores at a lightning pace. But growth of China’s 300 billion yuan ($43 billion) bubble tea market was expected to start slowing this year, with the growth rate dropping from about 20% in 2024 to 16% by 2027, according to a CICC report issued last December.

The combination of slowing growth and addition of so many new stores is proving toxic for company profits, which were previously quite strong. Nayuki (2150.HK) reported it fell into the red in the first half of this year, while Chabaidao’s profit during that time tumbled by about half to 237 million yuan, according to their latest financial results. In another worrisome sign, Chabaidao in late July abruptly announced it was canceling its dividend declared just a month earlier, in what looked like a move to conserve cash as its finances deteriorated.

Tanking Stocks

It’s not hard to see why the CSRC is worried about market sentiment towards bubble tea stocks. Chabaidao’s shares have moved steadily downward since the company raised $330 million in its April IPO, and at Monday’s close of HK$5.88 are now down about two-thirds from their listing price of HK$17.50. If that’s not enough to scald investors, Nayuki’s shares are also down about 58% this year, and anyone unlucky enough to have held the stock for the three years since its 2021 IPO has now lost about 93% of their investment.

Reflecting just how much these stocks have fallen out of favor, Nayuki’s shares currently trade at a price-to-sales ratio (P/S) of just 0.41, though Chabaidao’s are a bit better at 1.38. Still, none of those ratios are what you’d expect for high-growth companies. That’s no big surprise since those companies appear to be headed into a new era of revenue contraction, reflected by Chabaidao’s report that its revenue fell 10% in the first half of the year.

The CSRC is also probably worried about the big amounts of money these bubble tea makers were hoping to raise through their new listings, which would draw money away from other Hong Kong stocks. Mixue was reportedly looking to raise as much as $1 billion, while Guming was reportedly aiming to raise up to $500 million.

Those two figures combined would equal nearly two-thirds of the $2.56 billion that all new listings in Hong Kong have raised so far this year, according to Dealogic data cited in the Reuters report. Fundraising in general has been quite weak in Hong Kong these last two years, with just $5.7 billion raised last year – about one-quarter the record $22.1 billion raised in 2021.

Investors greeted the Reuters report with a hint of optimism, with Chabaidao’s stock up 8.7% on Monday. Nayuki’s shares also rose by a smaller 0.75%, though that was still ahead of a slight drop for the broader Hang Seng Index. Still, the small rally is unlikely to last long since it’s based on regulatory actions rather than anything market-related.

That brings us back to the question of CSRC interference in Hong Kong’s stock market. The Chinese regulator has been criticized before for its heavy-handed tactics in the Shanghai and Shenzhen stock markets. But the criticism has been relatively muted since those markets are largely closed to foreigners. The same isn’t true for Hong Kong, which is seen as one of the world’s main marketplaces where foreigners can invest in Chinese stocks.

In this particular case, perhaps some international investors will breathe a sign of relief that China is taking steps to support the Hong Kong market in the face of weak sentiment. But over the longer term, such steps are more likely to undermine investor confidence, since they signal the Chinese regulator could intervene at any time based on Beijing’s own priorities and not necessarily what’s best for investors.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.