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IPOs: Meituan-Dianping Listing Shows Signs of Life

Bottom line:  Nio stock is likely to give back most of its huge second day gains over the next couple of weeks, while Meituan-Dianping could debut strongly but will likely stagnate for its first two years as a public company.

It seems that perhaps I was a bit premature earlier this week when I wrote the latest listing by electric vehicle (EV) maker Nio showed investors had lost appetite for money-losing Chinese tech firms. Nio's stock has actually done quite well in its first two trading days, after a tepid pre-debut reception. And now we're getting word that money-losing online-to-offline (O2O) services giant Meituan-Dianping has also priced its own mega-offering in Hong Kong at the top of its range.

Such a sudden shift in sentiment seems hard to explain, and I do suspect there may be at least a little manipulation going on behind the scenes. Still, perhaps investors are feeling just a tad more upbeat about Chinese tech these last few days in light of new signs that the US-China trade war may soon ease with new talks scheduled to try to hammer out a deal.

We'll spend the second half of this post looking at Meituan-Dianping, which is likely to make one of the biggest China Internet offerings this year when it makes its trading debut in Hong Kong next week. But first let's begin with a post-script for Nio, the money-gobbling EV startup whose New York IPO sputtered to the gate before its shares actually began trading on Wednesday.

I had predicted a weak opening for Nio (previous post), in line with all the earlier signs, which included a slashing of the original fund-raising target by half. Indeed the stock started weakly, but then ended up finishing up by a modest but respectable 5 percent for the day. But what has knocked everyone's socks off has been the stock's second-day performance, which saw the shares leap 70 percent on extremely high volume.

Nobody seems to have an explanation for this huge upward correction. If the volume was low I might say there was some manipulation going on behind the scenes. One of my sources at an investment bank that worked on the deal told me that the top 10 buyers of IPO shares accounted for nearly 90 percent of all orders, which leads me to believe that there was probably some trading going on back and forth between those big buyers. 

Still, that big of a gain does seem to appear that at least someone thinks the shares were more beaten up than they should be. The company does, in fact, have a real product in the market and has notched some sales, so that does show it could eventually earn some money. But I still stand by my earlier forecast that this is a tough market, and I have serious doubts about whether Nio will be one of the many new players to ultimately survive.

Amazing Meituan

Next let's move to Meituan-Dianping, whose IPO has been many years in the making and appears to be generating some buzz. The company has priced its IPO shares at HK$69 ($8.87), which is very close to the top of its previously stated range of HK$62 to HK$70. (English article) At that price the offering will raise about $4.2 billion, which would probably qualify as the year's biggest Internet listing.

I've also written about this offering before, and came to the conclusion that this probably looks like a good investment perhaps two or three years down the road when competition starts to abate in some of its main business areas. Two of Meituan-Dianping's main areas, O2O takeout delivery and shared bikes, are currently losing massive money. Its third and oldest area, group buying and restaurant ratings, is presumably doing a bit better.

Investors don't appear to be too scared off by the company's large losses, which totaled a massive 18.9 billion yuan ($2.8 billion) last year. Granted, a big portion of that is coming from the takeout dining business, which accounted for nearly two-thirds of the company's revenue. The company has also spent heavily to acquire leading shared bike company Mobike, which also looks poised to be the lone survivor in what has become a two-way race in a highly competitive sector.

At the end of the day, I still think there's some manipulation going on with Nio's debut and now with Meituan-Diaping's IPO pricing, since both companies count the very cash-rich Tencent (HKEx: 700) among their investors. But these are very large offerings that probably can't be manipulated all that long, and I do suspect that means that Nio's stock will probably give back much of its second-day gains over the next week or two. I'll continue to stick by my earlier Meituan assessment, namely that the stock is unlikely to do very much for the next couple of years but could be a good performer after that.

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