China Online Education IPO Falls Flat, iKang Bidders Back Off

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Includes: KANG
by: Doug Young

Summary

Chinese IPOs in New York continue to sputter, with the latest offering by China Online Education Group debuting flat after raising a very modest $46 million.

One of the most hotly contested privatizations in an exodus of Chinese companies from New York has come to an abrupt and somewhat disappointing end in the case of clinic operator iKang.

Both moves point to weak investor interest in US-listed Chinese stocks, which is likely to persist through year end.

Bottom line: A lackluster debut for China Online Education (NYSE:COE) and abrupt end to the bidding war for iKang point to weak investor interest in US-listed Chinese stocks, which is likely to persist through year end.

Chinese IPOs in New York continue to sputter heading into the summer months, with the latest offering by China Online Education Group debuting flat after raising a very modest $46 million. Meantime, one of the most hotly contested privatizations in an exodus of Chinese companies from New York has come to an abrupt and somewhat disappointing end in the case of clinic operator iKang (NASDAQ:KANG). That development has come with word that two groups vying to buy out iKang have suddenly dropped their bids, yielding to a third group associated with e-commerce giant Alibaba (NYSE:BABA).

It does seem somewhat fitting that both of these fizzles are coming as we head into summer, which is a famously slow period for new activity on Wall Street as many traders and bankers take holidays. In this case summer won't represent a huge pause in New York IPO activity by Chinese companies, since China Online Education is only the third such listing on Wall Street so far this year.

There's not a lot to say about the China Online Education, except that it's noteworthy for its small size and fact that it didn't draw much investor interest. The company, which offers online English language training over its 51Talk website, priced its American Depositary Shares (ADSs) at $19, or exactly in the middle of its range of $18-$20 (English article, Chinese article).

The shares traded in a very narrow range on their debut and ultimately ended their first day nearly unchanged, down by just 0.1 percent to be precise, giving the company a market value of $1.4 billion. Only 2 other Chinese companies, metals trader Yintech (NASDAQ:YIN) and biopharmaceutical company BeiGene (NASDAQ:BGNE), have made New York IPOs this year, reflecting weak investor appetite for such offerings.

Net Outflow

That weak appetite is a primary factor behind a flood of movement in the other direction, which has seen some 40 US-listed Chinese companies launch privatization bids since the start of last year. Many of those have stumbled for various reasons, and most of the ones that have been completed were launched by management-led groups without any counter offers from independent private equity buyers.

One of the few exceptions to that pattern was private clinic operator iKang, which is operating in an area with big growth potential as Beijing opens the healthcare sector to private investment. A group led by iKang's founder Zhang Ligang launched a buyout attempt a year ago, only to get significantly outbid three months later by a group whose members included the company's chief rival Meinian.

iKang's founder swore he would never let Meinian take control of his company, and a war of words and other actions erupted in the months after that. But then a surprise development came last week when a group led by Yunfeng Capital, which is associated with Alibaba founder Jack Ma and several other big-name investors, announced its own rival offer (previous post).

Now it seems that Yunfeng's entry has intimidated the original two bidders who have suddenly dropped out of the contest, according to the latest media reports (Chinese article). iKang chief Zhang issued an open letter announcing the revocation of his group's original bid and added he would leave the company once the privatization was complete.

That strongly implies that Zhang has reached an agreement with Yunfeng, since he controls a large block of iKang shares. Such an agreement would also explain why Meinian is withdrawing its bid. Yunfeng only announced a price range in its offer, saying it would buy iKang's ADSs for $20-$25 apiece. iKang shares now trade at just under $20, meaning there could be opportunity for some quick profits in the likely event that Yunfeng's final offer will come in the middle of its range at around $23.