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Chinese tech groups set to boost country’s listless CDR market

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Two big tech groups are set to give a shot in the arm to the market for Chinese depositary receipts (CDRs), once feted by Beijing as the premier channel for fast-growing companies to sell shares in mainland China.

The planned offerings on Shanghai’s tech-focused Star Market for artificial intelligence start-up Megvii and computer maker Lenovo would mark the first big companies to list via CDRs since they were launched to fanfare nearly three years ago.

The announcements also come as Washington has tightened scrutiny on Chinese groups that trade in New York, including legislation that could force delistings and sanctions that ban US investment.

Megvii, a facial recognition company, had previously tried for a public listing in Hong Kong. It cut its fundraising target from $1bn to $500m, before abandoning the offering altogether last year against a backdrop of US sanctions.

The company was added to the US commerce department’s entity list in 2019 on grounds of alleged human rights abuses in China’s Xinjiang region. Megvii has said it did not generate any revenue from Xinjiang in the six months to June 2019.

A filing made public on Tuesday said Chinese state-owned Citic Securities was working with Megvii on a listing, the first step in a months-long process. The group did not say how much it is looking to raise.

Meanwhile, the Hong Kong-listed shares of Lenovo jumped as much as 17 per cent to their highest level in more than five years on Wednesday. Lenovo said it would issue up to 10 per cent of its enlarged share capital in the CDR offering.

CDRs were announced in 2018 with the hope of luring back to the mainland Chinese tech groups that trade in New York via American depositary receipts, which have been used to raise billions of dollars on Wall Street. The CDR system was partly meant to allow Chinese tech companies to sidestep issues such as the use of variable interest entities, which were otherwise not permitted on mainland exchanges.

But the first significant attempt to issue CDRs by smartphone maker Xiaomi fell apart in the face of regulatory demands from Beijing.

The only company to successfully list using CDRs is Ninebot, the owner of two-wheel vehicle maker Segway, which raised Rmb1.3bn ($200m) on the Star Market in October. Many large Chinese tech groups trading in the US have instead opted for secondary listings in Hong Kong.

Analysts said there were drawbacks to selling equity via CDRs. Ninebot faced a lengthy approval process due to regulatory requirements.

“There are lots of technical difficulties and uncertainties with CDR issuance,” said Bruce Pang, head of research at investment bank China Renaissance.

CDRs cannot be swapped like-for-like with shares in the same company that trade on an offshore venue, Mr Pang added, and they can also attract higher custodial fees.

On the plus side, he said, trading and issuance of CDRs is available to UK-based investors through the Shanghai-London Stock Connect scheme.



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London celebrates but for Deliveroo IPO to succeed, it needs to deliver

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The City’s future is arriving by bicycle. It may not match what was ordered.

Deliveroo on Thursday made formal its promise to float in London. The Hill review of listings rules prompted the courier dispatch service to add a preamble to its intention to float statement, expected early next week. Lord Jonathan Hill gave Deliveroo’s politically savvy spin team a quote for the media blitz, as did Oliver Dowden MP and London Stock Exchange chief executive David Schwimmer. Looser rules, they all agreed, make London a more attractive destination for technology champions.

There’s a reason this looks like lobbying. Deliveroo founder Will Shu intends to retain control of the group, so his float will involve a two-tier shareholder structure. Under current rules, that means a standard listing and FTSE index exclusion. Investors will be offered the insurance policy of a three-year sunset clause, meaning premium status can still be secured even if the relaxed attitude to dual-class ownership never becomes law. The clause is a deadline Shu will want to neutralise.

The Deliveroo camp has been vague about potential valuations. Optimism runs as high as $10bn, with the floor provided by a fundraising agreed in January that put the headline value at just over $7bn. The success of online retailer THG — up 40 per cent since its standard-grade float in September — provides a useful benchmark for founder-controlled businesses.

But THG is a different proposition. Whereas its profitability is proven, Deliveroo is a cash-burning machine. Its accounts show losses of £133m in 2016, £199m in 2017, £231m in 2018 and £318m in 2019. Lockdowns perked up performance — the January fundraising preceded six months of operating profitability, according to Shu — but only after an early wobble that convinced the Competition and Markets Authority in April last year to show charity to what it called a “failing firm”.

Profitability rarely matters much in food delivery. Germany’s Delivery Hero and DoorDash in the US both have stratospheric valuations and conceptual business plans where any route to profitability requires competitors to fail. What helps them is that ownership across the sector is a web of interconnections. All the main owners appear to apply the same strategy of securing market leadership or exiting.

Deliveroo is different. It was once considered a weak competitor, until Covid-19 came to lift all boats. It was once an acquisition target for any operator keen on tidying up an overly competitive UK market, until Amazon last year bought a 16 per cent blocking stake that can only be increased with CMA approval.

Now it’s a British tech champion, using pandemic-inflated metrics to give existing backers an exit opportunity and raise yet more cash to burn in search of a functional business model. Those rushing to celebrate its choice of IPO venue as a victory for regulatory liberalism might soon wish they had waited to see exactly what’s inside the box.

B&M’s no bargain

Investors have been filling baskets with B&M shares almost as fast as shoppers at the discount retailer have been stocking up on home essentials, writes Andrew Whiffin.

Stockpiling and lockdown demand helped propel the stock into the FTSE 100 index last year, but Thursday marked a crucial hurdle. In a fifth and likely final unscheduled trading update in the year to March, B&M said earnings before interest, taxes, depreciation and amortisation would be £50m higher than it previously expected. The positive news was overshadowed by caution that the group’s final month would be up against tough comparisons from last year’s March spike in panic buying. 

The short period of uncertainty will help determine whether a good year for the retailer was a blip or part of a longer lasting trend. B&M estimated new customers in June accounted for almost a quarter of shoppers. A strong March would offer an indication that these B&M converts can become regulars. Shares trading at 17 times two-year forward earnings — the top of their recent valuation range — need signs of permanent market share gains to continue their upward journey.

The benefits of 2020 have flowed directly to shareholders, the largest being the holding company of the founding Arora brothers, with an 11 per cent stake. Special dividends of £600m in the past year push total returns to almost 60 per cent since the start of 2020, eclipsing the flat returns of the dominant UK grocers. 

Bulk buying for lockdowns is just one way the pandemic helped the group. Like-for-like sales growth of almost a quarter in the six months to September was supported by a higher mix of merchandise trade. Housebound consumers bought more DIY and gardening equipment helping to boost profit margins.

Ebitda in the first half of the year doubled while margins gained almost 5 percentage points, hitting 13.3 per cent. This is expected to ease in the coming year as one-off sales drop out of the numbers. Analysts’ consensus estimates for 2021/22 are at present about a tenth below those for the current year. 

B&M has been one of the biggest beneficiaries of harsh UK lockdowns that have left consumers bored, homebound and cash rich. As vaccine rollouts hasten a return to normal, that trade remains exposed.

Deliveroo: bryce.elder@ft.com
B&M: andrew.whiffin@ft.com

City Bulletin

Sign up to the City Bulletin newsletter for the latest company news. Every morning our UK equities reporter Bryce Elder covers the biggest business stories and delivers them straight to your inbox by 8am UK time.



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Deliveroo picks London for IPO after listings review

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Deliveroo has chosen London for its highly anticipated initial public offering after Rishi Sunak, the UK chancellor, endorsed an overhaul of listing rules to allow founders to retain more control after going public. 

The multibillion-pound IPO is expected to be among London’s largest this year, handing the City a much-needed win over New York and Amsterdam at a time of feverish activity in new tech listings. 

“Deliveroo is proud to be a British company, and the selection of London as its home for any future listing reflects Deliveroo’s continued commitment to the UK,” said Claudia Arney, Deliveroo’s chair. 

Deliveroo’s decision follows the publication on Wednesday of a review by Lord Jonathan Hill, former EU financial services commissioner, which recommended a wide range of reforms to loosen listing rules in the UK. 

Among Hill’s recommendations were proposals to allow dual-class share structures, which allow founders to hold on to extra voting rights after an IPO, to be used by companies trading on the London Stock Exchange’s “premium” segment. The dual-class arrangement is popular in Silicon Valley, where it is used by companies including Facebook and Google parent Alphabet. 

The move, which Sunak endorsed during Wednesday’s Budget, was designed to attract fast-growing tech companies such as Deliveroo, though some London fund managers fear the change puts shareholder protection at risk.

Deliveroo said in a statement on Thursday morning that its dual-class structure would be “closely in line” with the Hill review’s recommendations and be limited to three years. However, the changes are unlikely to come into force before it has completed its IPO, with initial paperwork expected to be filed as soon as next week.

Companies with dual-class structures can already trade on the LSE’s standard listing. Once the new rules are in place, Deliveroo would be able to move up to a premium listing. A person close to the company said that the Hill review was also likely to attract more tech companies to London, making it more attractive as a listing venue overall.

“Alongside the dual-class share structure, Deliveroo intends to have a strong commitment to corporate governance standards including a majority independent board of directors as well as upholding diversity standards,” the company said. 

Will Shu, Deliveroo’s co-founder and chief executive, said he was “proud and excited” to list in London, where the company first began making restaurant deliveries in 2013. 

Sunak hailed the decision as “fantastic”. 

“Deliveroo has created thousands of jobs and is a true British tech success story,” he said in a statement. “It is great news that the next stage of their growth will be on the public markets in the UK.”

Arney added: “London is not just where Deliveroo was born, it is one of the leading capital markets in the world, with an incredible technology ecosystem, sophisticated investment community and a skilled talent pool. The time-limited dual-class structure would provide Will and his team with the certainty needed to execute against their ambitious growth plan to become the definitive online food company.”



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Investors push back against UK listings overhaul

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London’s biggest fund managers have pushed back against proposals to liberalise the City’s stock market listings regime, saying changes aimed at luring in technology businesses and special purpose acquisition companies risk “watering down” investor protections.

A report by Lord Jonathan Hill, published on Wednesday, recommended allowing dual-class share structures for companies admitted to the London Stock Exchange’s “premium” segment, and lowering the limit on the free float of shares in public hands from 25 per cent to 15 per cent, meaning founders need to sell less of their business to list it. He also laid out proposals to make the UK a stronger potential venue for listings of blank-cheque companies known as Spacs.

UK companies and the country’s main listings venues, the LSE and Aquis Exchange, said the plans were vital to improving London’s attractions in a globally competitive market. But some investors are nervous.

Chris Cummings, chief executive of the Investment Association, the trade body that represents asset managers with a total of £8.5tn in assets, said the proposals were an “important first step”, but he warned that the UK needed to ensure “appropriate investor protections for minority shareholders”.

One large investor in UK-listed companies said it was strongly opposed “to the watering down of rules governing premium listing”. “Shareholder protections should not be used as a bargaining chip to prove the UK is open for business,” the investor said.

Another large global asset manager said the current standards for premium listings, including the principle of “one share, one vote”, were “critical”.

“The UK has gold standards for stewardship,” the fund manager said. “If we are going to create more flexibility for a listing, we would want over time [for companies to] work towards a premium listing with ‘one share, one vote’ and standard free float with sufficient liquidity.”

Some asset managers took a more upbeat view of the Hill review.

“Schroders is in full support of Lord Hill’s review. It is crucial that we do all we can to make the UK the most attractive place for companies to list and to do business for the benefit of investors,” said Peter Harrison, chief executive at Schroders, the biggest listed UK fund manager.

Hill’s proposals are intended to boost London’s global standing as an equity market, which has weakened in recent years as the US and Hong Kong have swept up the majority of in-demand tech listings. New York’s markets have also gained a boost from a wave of Spacs, which raise money from investors and list on a stock market, then look for an acquisition target to take public.

The departure of some large technology stocks such as Arm in recent years has cemented the blue-chip FTSE 100 index’s bias towards financials, energy and mining stocks. A loss of trading businesses to European rivals since Brexit has also further dulled the allure of the City.

The Hill recommendations are “smart, pragmatic measures”, added Sir Martin Sorrell, whose S4Capital digital market and advertising business has a dual-class share structure. “[It] also signals that the government’s ‘Singapore on Thames’ vision for a post-Brexit Britain is on the way to becoming a reality,” he said.

Makram Azar, chief executive of Golden Falcon, the European technology blank cheque company that opted to list in New York, said London needed to make significant structural changes.

“The recommendations will no doubt spur investors to look at listings on the LSE in the future. It will take time to develop the whole ecosystem around Spac listings in London, but this is the start of the sea change that’s needed.”

Others cautioned against the risks of making changes to attract blank cheque companies.

“Spac deals may be booming in the USA right now, but fear of missing out is just about the worst possible reason for making any investment decision,” said Russ Mould, investment director at stockbroker AJ Bell. “It is therefore to be hoped that the FCA maintains its critical faculties when it assesses Lord Hill’s proposals and the safeguards that he offers alongside them.”



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