2 Chinese IPOs to Add to Your Watch List

2020 has been a very volatile year for investors. After hitting a bottom in March, the financial markets roared back to trade above their February peaks, prompting a flurry of companies to go public to benefit from an improvement in market valuation.

It can be difficult for investors to keep track of so many IPOs. Thankfully, you only need a handful of new ideas every year to make good returns from the stock market. Here are two Chinese IPOs that should make it onto your watch list.

Hand holding a card that says IPO

Image source: Getty Images.

1. KE Holdings

KE Holdings Inc. (NYSE:BEKE) is one of the biggest Chinese technology companies that most investors have never heard of.

Also known as Beike, KE Holdings is the owner of two leading businesses: Lianjia and Beike. Lianjia is a leading real estate brokerage in China that helps homeowners rent or sell their properties, and also helps customers find a house to buy. Beike is a real estate platform that facilitates housing transactions and services — think of it as the Zillow of China. It matches brokerages (such as Lianjia) and homeowners to customers.

Beike debuted on the New York Stock Exchange on Aug. 13, and raised $2.12 billion after selling 106 million American depositary shares (ADS) at $20 per share. The stock opened at $35 and was at about $71 as of Oct. 27, giving it a market valuation of about $80 billion. Investors are excited about the company, and for good reason.

To start with, Beike is the largest platform of its kind, having facilitated a gross transaction value (GTV) — including home sales, home rentals, and other related services — of RMB 2.1 trillion ($301 billion) in 2019, giving it a market share of 20% in China. As far as GTV is concerned, Beike is already the second-largest commerce platform in China, behind only e-commerce giant Alibaba, according to information the company provided.

Perhaps more important is that over time, Beike will benefit from the self-reinforcing cycle of a growing number of customers, agents, and property listings. Customers naturally go to the platform with the highest number of property listings, while homeowners and agents understandably prefer to list their properties on the platform with the most customers. Hence, there’s a good chance that Beike can grow its business for the foreseeable future by riding not only on industry growth but also increasing its market share within the industry. Its recent financial performance reflects such growth potential: Between 2017 and 2019, revenue improved 80% to $6.5 billion, GTV more than doubled, and the number of agents on its platform almost tripled to 358,000.  

Still, KE Holdings remains unprofitable, with net losses widening from RMB 538 million in 2017 to RMB 2.18 billion in 2019. As it continues to invest in its business, there’s a good chance that it will remain in the red in the near future.

With a market cap of $80 billion, the company trades at more than 12 times 2019 sales. Though it’s not the most expensive company out there — some recent IPOs, like Snowflake, trade at more than 200 times sales — it is by no means cheap. For this reason, it’s best to keep the company on your watch list and wait for a better entry point.

2. Miniso Group

Miniso Group Holding Limited (NYSE:MNSO) is a China-based global retailer focusing on selling “aesthetically pleasing, high-quality and affordable lifestyle products.” It offers a wide range of products (about 8,000) across 11 major categories, including home decor, textiles, cosmetics, small electronics, and personal care. Its products are sold primarily through its network of more than 4,200 MINISO stores — 2,500 in China and the remainder across 80 other countries. 

Since opening its first store in China in 2013, Miniso has expanded rapidly. Revenue reached $1.3 billion in the latest fiscal year thanks to its smart and well-executed strategies.

First, it sells products at a low price point (95% of its products retail at about $7), ensuring that customers from all walks of life can afford these products.  Its huge procurement volumes, as well as its efficient supply chain management, are the key enablers of its low-price strategy. Second, its rapid product development cycle  launches an average of 600 stock keeping units per month, encouraging customers to visit its stores frequently to hunt for new (and unexpected) products.

Third, Miniso operates mostly a franchising model in which its partners invest capital and run the business while Miniso provides the brand and guidance on store operation in exchange for a portion of final sales. This frees up plenty of resources, both capital and managerial, and allows the company to invest in product development and brand-building. The result is a win-win: The retail partners achieve good investment returns and Miniso expands its store network rapidly.

Still, Miniso operates in the highly competitive retail industry and needs to execute well to retain its existing customers and gain new ones. A slowdown in same-store sales growth and slower new-store openings would both be red flags for investors. Moreover, the coronavirus pandemic has impacted Miniso as it has other retailers that operate physical stores. As consumers change their shopping behavior by making fewer visits to brick-and-mortar stores and doing more shopping online, the long-term sustainability of Miniso’s business model will be put to the test. To mitigate these negative effects, the retailer is developing its online sales channels and improving its membership program.

With an IPO price of $20 per share, Miniso raised $608 million after selling 30.4 million ADS last month. Since then, its share price has fallen to around $19, giving it a valuation of around 42 times trailing earnings based on adjusted net profit. This is a high price tag even for a fast-growing retailer. Hence, investors might want to keep this stock on their watch list until its price becomes more attractive.

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