IPO ALERT: Chinese Tech IPOs Continue Despite Trade War

china tech ipo
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Chinese Tech IPOs to Watch

Fear, fear, fear. Investors have been feeling it ever since President Donald Trump provoked a trade war with China, yet there’s a silver lining to consider: Chinese tech giants are going public at a steep discount.

We saw that with the Xiaomi IPO.

Shares fell below the IPO price within hours of trading. Although analysts blamed this failure on Xiaomi’s underwhelming financials, I think the overall market environment had a strong part to play. Pessimism is a real thing, folks.

However, pessimism doesn’t last forever. I am one of those weirdos who believe that the long arc of the investing universe bends toward growth. So I see this discount as an opportunity.

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Chinese tech companies already available to U.S. investors—like Alibaba Group Holding Ltd (NYSE:BABA) and Baidu Inc. (NASDAQ:BIDU)—are discounted by 5.6% and five percent, respectively.

Chart courtesy of StockCharts.com

The IPO market is even more promising. Xiaomi is already active, and a host of other Chinese tech IPOs are on the way this year, including car-sharing giant Didi Chuxing, Ant Financial Services Group, and Meituan-Dianping.

The one I’m watching, however, is the Tencent Music IPO.

In case you haven’t heard, Tencent Holdings Limited (OTCMKTS:TCEHY) is spinning off its music division. The result is a $30.0-billion company capable of going toe-to-toe with Spotify Technology SA (NYSE:SPOT), currently the world leader in music streaming.

Oh, I almost forget the best part—the Tencent Music IPO will take place in the U.S.

No details have emerged with regards to the specific exchange or target price. However, the mere fact that Tencent Music is willing to go public is significant. It shows that even trade wars can’t stop the intermingling of capital markets.

More specifically, it shows that “Spotify” and “Apple Music” are less dominant than previously imagined, despite the former having IPO’d in April and the latter having more money than God.

Should You Consider Investing in Tencent Music IPO?

Last year, Tencent spun off its digital books publishing unit in what became a pretty successful IPO. So, this isn’t the company’s first rodeo.

Nevertheless, Tencent Music faces an uphill battle.

It has 15 million paying subscribers in total, whereas Spotify has 22 million in the United States alone. Apple Music is close behind with 21 million, and “Amazon Music” is somewhere in the distant background hoping for an eleventh-hour miracle.

The global story is equally depressing. There, Spotify is the undisputed ruler, with 75 million paying users and an estimated 25 million slated to join by the end of the year.

So, you could say that Tencent is wading into this fight rather late in the game. However, the company has an ace up its sleeve—China. A country of 1.4 billion people, a rising middle class, and regulators with no compunctions about helping domestic firms.

This stranglehold on the world’s largest market makes Tencent Music a force to be reckoned with.

Plus, according to CNN Money, the firm “has exclusive deals with Sony Music, Universal Music Group and Warner Music Group” that allow it “to decide which songs rivals can stream.” (Source: “China’s Tencent turns to US for IPO of its music business,” CNNMoney, July 9, 2018.)

With that kind of power, Tencent has the keys to the middle kingdom.

I foresee only one problem: President Trump. He could hold an axe over Chinese tech IPOs in order to scare China back to the bargaining table.

Tencent seems to have considered this eventuality because its press release took extra pains to emphasize the tentative nature of the listing. Here’s an excerpt [emphasis added]:

“The Proposed Spin-off is subject to, among other things, the obtaining of approval(s) from the relevant authorities in respect of the listing of, and permission to deal in, securities of Tencent Music, and the final decisions of the Board of the Company and the board of directors of Tencent Music. Shareholders and potential investors of the Company should be aware that there is no assurance that the Proposed Spin-off will take place or as to when it may take place.”

(Source: “PROPOSED SPIN-OFF OF TENCENT MUSIC ENTERTAINMENT GROUP,” Tencent Holdings Limited, July 8, 2018.)

Barring this one potential roadblock, investors should see the Tencent Music IPO sometime in the third quarter of 2018.

Analyst Take

I usually warn investors away from IPO investing. For the most part, it’s a rigged game where investment banks and institutional investors can take advantage of the little guy. But given the current climate, I think Chinese tech IPOs are a steal.