November 16, 2018 / 3:20 AM / a month ago

Breakingviews - Asian IPO slump brings welcome valuation sanity

BabyTree Group Chairman and Chief Executive Officer Wang Huainan attends a news conference ahead of the company's IPO in Hong Kong, China November 14, 2018. REUTERS/Bobby Yip - RC1E13FF7200

HONG KONG (Reuters Breakingviews) - A slump in new Asian equities is bringing some welcome sanity to valuations. Having raised a collective $62 billion in nine months via 480 listings, according to consultancy EY, overheated Asian stock markets are finally cooling off. Deals from Tencent and others are being delayed or repriced in an overdue correction. With luck, more rationality will creep in elsewhere, too.

    Take the recent climbdown by Babytree, a Chinese parenting website backed by e-commerce giant Alibaba. Inspired, perhaps, by stratospheric first-day pops in Hong Kong enjoyed by companies such as China Literature earlier in the year, the company originally sought a valuation of up to $5 billion for its initial public offering, according to IFR, equivalent to 200 times its 2017 adjusted earnings.

    China Literature, though, subsequently joined other recently listed stars including smartphone maker Xiaomi, food delivery conglomerate Meituan Dianping and hotpot chain Haidilao on the secondary market wall of shame. All have fallen below their IPO prices.

     Babytree, which slashed its fundraising target by 70 percent and is now seeking a humbler $1.9 billion valuation in an effective down round from Alibaba’s entry in May, is not alone either. Travel website Tongcheng-Elong and Tencent-backed fashion site Mogu also just sharply scaled back their debut plans.

    Others are holding off altogether. Cryptocurrency mining equipment maker Canaan let its Hong Kong listing application lapse this week; Hollywood studio STX did the same last month. Tencent Music postponed its New York IPO.

    Investment bankers may be starting to feel the pain, but something eventually had to give. While developing Asian economies remain solid growth stories, equity prices have soared into the stratosphere, especially for unprofitable internet startups. The rush for new listings turned them into speculative mosh-pits. Although venture capitalists and private equity firms have sold into the exuberance, they have been struggling to find new targets at reasonable prices.

    It could yet take a bit longer. The ChiNext board in Shenzhen, for example, loaded with hot tech stocks, still trades at 27 times average forward earnings despite falling 20 percent in 2018. For investors waiting for an opportunity to buy Asia low, the opportunity may be coming.

Breakingviews

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