Game Over for China’s U.S. Tech IPOs?
(Bloomberg Opinion) -- DouYu International Holdings Ltd. may have just hit the limit of foreign investor enthusiasm for China's burgeoning competitive video-gaming business.
The eSports live-streaming provider has slumped since listing on Nasdaq in a $775 million initial public offering that was completed on July 16. DouYu finished unchanged on its trading debut after late buying erased a loss of 4.3%. Since then, the bears have reigned, with the stock down 8.7% from its IPO price as of Friday’s close.
The negative sentiment is out of step with recent U.S. listings of Chinese companies. Of the 16 stocks from the nation that started trading on American exchanges so far this year, the median first-day gain is 16.6%, compared with 2.3% for all of 2018. Of the total, 63% rose on their debut versus 68% last year. The data indicate the U.S.-China trade war has had little impact on investor appetite in the IPO market.
There were early signs of trouble for DouYu. The company delayed its plans to list in the U.S. in May amid the trade tensions. After spotting some blue sky between the clouds, DouYu and its bankers made another attempt this month and were able to get the transaction done – but only by pricing the shares at the bottom of the range.
Competitive video-gaming is hot in China, with all the ingredients for further growth. Promotion of the industry has become government policy, as my colleague Shuli Ren noted last week. In days of yore, the chance to be part of a booming new Chinese business would be catnip to most investors. So DouYu didn’t appear to be a tough sell.
The limp response shows that investors are getting more discerning. Huya Inc., one of DouYu’s closest competitors, listed 15 months ago and climbed 34% on its first day. The stock almost tripled in the first month of trading.
While the businesses of DouYu and Huya are similar, their financials aren’t. When Huya listed in May last year it had just turned an operating profit for the first quarter. The company posted an operating margin of 3.3% on revenue of 843 million yuan ($123 million).
DouYu is almost twice as big as Huya was then, at 1.49 billion yuan in revenue for the first three months of 2018. But its operating margin was minus-3.3%, a sign that this business may not have economies of scale. While sales more than doubled from a year earlier and the operating loss margin narrowed drastically, it seems some investors weren’t willing to wait around for profits to appear.
They may also have been burned by Huya. The 2018 first-quarter profit looks to have been a fluke, with subsequent periods barely achieving even half the operating margin of that pre-IPO level. The stock’s mammoth early gains have mostly been wiped out, though Huya still trades 81% above its offer price.
Also likely weighing on sentiment for DouYu is the decision by one founder and one early investor to cash out in the IPO, instead of waiting for a lockup period to expire, as is often the case. Stock sold by Co-CEO Zhang Wenming and Aodong Investments, a fund owned by angel investor Cai Dongqing, amounted to about one-third of all shares offered in the IPO. This kind of signalling doesn’t inspire confidence when you’re trying to tell investors that your unprofitable business will soon be a moneymaker.
China’s eSports industry isn’t just a fad. As U.S. investors are learning, though, all games have winners and losers.
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Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.
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