China-U.S. IPO Train Creeps Ahead With First New Listing Application

Key Takeaways:

• China’s securities regulator said it has received an application from Majestic Ideal Holdings for a U.S. listing
• The notice could indicate a 2-year-old pause in new U.S. listings by Chinese companies could end soon, potentially unleashing billions of dollars in new IPOs

By Doug Young   

Majestic Ideal Holdings Ltd. The Shanghai-based company’s name sounds quite unremarkable. So does its business providing supply chain management services for textile companies.

But this obscure company could carry far larger significance than its name and business suggest, following its appearance on an announcement last week on the website of the China Securities Regulatory Commission (CSRC), China’s securities regulator. In that simple notice on Wednesday, the CSRC said Majestic Ideal had formally filed for permission to list its shares in the U.S., and that it received the application on May 30.

That marked the first such notice by the CSRC involving a Chinese company seeking a U.S. listing since new rules took effect March 31 saying all Chinese firms wishing to list overseas must first get permission from their hometown securities regulator. Observers interpreted the notice to mean that applications to resume U.S. listings have quietly begun moving through the CSRC’s vetting process, and the first approvals could come in the next few months.

Such a development could finally break a logjam that has built up for more than two years now, resulting in a near halt to what was once a steady stream of U.S. listings by Chinese companies. The trans-Pacific IPO train had previously helped hundreds of Chinese companies list in New York over the previous three decades, including such big names as e-commerce giants Alibaba BABA and JD.com JD, leading search engine Baidu BIDU and the Twitter-like Weibo WB.

There’s quite a bit of history here, which we’ll recount shortly. But the bottom line is that a resumption in New York Chinese IPOs could unleash a flood of pent-up demand, potentially resulting in billions of dollars in new listings in the not-too-distant future.

Of course, much has changed since both the U.S. and China slammed the brakes on new Chinese listings in New York midway through 2021. The global IPO market entered a deep freeze this year, so it’s quite possible we wouldn’t see many Chinese IPOs in New York even if they were still allowed. And the kind of private Chinese companies that previously flocked to New York now have a number of other similarly attractive and less controversial alternatives for listing their shares closer to home.

Still, New York will always have an attraction for many Chinese companies over the two main alternatives to emerge – the Hong Kong Stock Exchange, and mainland China’s two Nasdaq-style markets that cater to the kinds of high-growth startups that previously flocked to New York.

Most notably, New York offers far higher liquidity than the other alternatives, including access to pretty much all major and mid-sized institutional investors from across the world. It also has a relatively simple registration-based listing system, and offers access to foreign currency that is often more difficult to obtain within China.

Signs that the 2-year-old logjam might soon be broken were probably a contributing factor to a big rally for U.S.-listed China stocks last week, reflected by a 9% jump for the iShares MSCI China ETF (MCHI.US). The larger, unrelated factor behind the rally was probably signs that Beijing may finally be preparing to move more aggressively to support China’s sputtering economy, based on signals from the latest meeting of the Communist Party’s Politburo.

Two-Year Silence

Against that backdrop, we’ll spend the second half of this review looking at the history that has brought us to this point. We’ll also take a closer look at Majestic Ideal Holdings.

The two-year IPO pause was the result of forces on both sides of the Pacific. On the U.S. side, the American securities regulator was frustrated over its lack of access to Chinese companies’ accounting records to conduct investigations when it suspected irregularities. China’s concerns lay in data security, as it worried that U.S. listings by big Chinese firms with huge troves of data could compromise national security by making that data available to the U.S. government.

The American concerns were addressed about a year ago when the U.S. and Chinese securities regulators signed a landmark information-sharing agreement, which has received positive reviews from both sides during an ongoing trial period. China addressed its own concerns by setting up the application process, which officially launched on March 31, that resulted in the CSRC’s notice regarding its receipt of Majestic Ideal Holdings’ application.

The selection of Majestic as the potential first company to resume New York listings doesn’t seem like coincidence. That’s because the company is quite ordinary and uncontroversial, engaged in a very traditional industry that’s unlikely to pose any national security risk. Majestic itself seems to recognize that and is confident of its chances, based on the fact that it already filed an IPO prospectus with the U.S. Securities and Exchange Commission (SEC) in late April, and updated the document in mid-May.

That document shows the company is quite small, seeking to raise about $15 million, giving it a market value of about $50 million. Its revenue is also quite modest and not growing too fast, up 15% last year to about 115 million yuan ($16 million).

In fact, the CSRC has published 10 notices to date from Chinese companies looking to list abroad. But Majestic is the first from that group specifically seeking a U.S. listing, with the others all eyeing the less-sensitive Hong Kong Stock Exchange. Nearly 100 companies have filed to list overseas since the new application process launched, with about three-quarters of those targeting Hong Kong and the remainder seeking to go to the U.S.

It seems somewhat fitting that Majestic Ideal Holdings could be the first company to relaunch the U.S.-China IPO train, since it is both traditional and also slightly high-tech due to its positioning as a supplier of supply chain management services for the textile industry.

In some ways the application’s approval almost seems like a no-brainer, since the regulator will probably determine such a listing poses little or no national security risk. The next big step will come if and when a larger, more tech-focused company advances down this new IPO path. Such a deal would be more typical of the kind of larger Chinese tech companies that once frequently targeted New York listings, often raising $100 million or more.