By Julie Zhu and Yingzhi Yang
HONG KONG/BEIJING (Reuters) - Valuations of Chinese unicorns have fallen below levels reached in the firms' most-recent fundraising rounds, secondary market offerings by existing investors show, highlighting the strain on backers amid the coronavirus outbreak and volatile markets.
Potential acquirers of privately held shares have been more actively approached about buying into the billion-dollar startups since China started reporting high numbers of virus cases in February, said two investors offered such shares.
Face recognition technology developer SenseTime, backed by Japan's SoftBank Group Corp, and DJI, the world's largest commercial drone maker, have seen valuations fall 10% since funding rounds in June 2019 and April 2018 to $6.84 billion and $14.5 billion based on secondary market offerings, the people said.
Stakes in online education provider VIPKID, backed by Tencent Holdings Ltd, and bike-share firm HelloBike, backed by Ant Financial [ANTFIN.UL], have also been offered at reduced valuations. VIPKID's $3.95 billion represents a 15% discount while HelloBike's $3.2 billion is 20% lower, said the people.
HelloBike, DJI and SenseTime declined to comment on the secondary market valuations. VIPKID did not respond to a request for comment.
The change in direction for China's once-buoyant private market comes as investors fear that takeovers and initial public offerings (IPO) - common ways of realising profit from early investment - will be harder to achieve, or at best take longer partially due to the coronavirus-induced economic downturn.
The coronavirus outbreak has greatly interrupted economic activity, prompting financial and corporate investors to exit investments early to ease liquidity pressure.
"Two years ago, we were joking 'cash is trash', but now cash is definitely king," said Robert Qiu, chief executive of Unicorn Selected, a Chinese platform focusing on private equity's secondary trading market.
"Some investors see no immediate way to exit through stock markets, but they need cash at hand so they're turning to sell shares in secondary markets."
Secondary trades are usually conducted through platforms such as Unicorn Selected, or marketed by well-connected bankers and corporate lawyers.
Venture capital investors exited 25 Chinese deals valued at $13.36 billion in the first quarter of 2020, versus just nine worth $5.34 billion in the same period last year, showed data from PitchBook.
Venture funding in Chinese firms also dropped 33% to $8.39 billion over the same period.
IPO BLOW
While not all valuations are falling, investors are frank about difficulties they face, particularly in industries such as catering, retail and tourism that have been hardest hit by restrictions on movement aimed at stopping the virus spreading.
"Our portfolio firms face significant challenges. Many are seeing revenues drop, which will have a massive impact on their cash flow," said David Tang, a partner of venture capitalist NGP Capital.
Investor confidence in Chinese unicorns has also been weakened by Nasdaq-listed Luckin Coffee Inc, a self-declared challenger to Starbucks (NASDAQ:SBUX) in China, which earlier this month said some of its 2019 sales were fabricated.
Luckin's shares, which floated in May, fell more than 80% on the news. Trading of the shares has been halted since April 7.
"The Luckin scandal will likely put a temporary freeze on U.S. IPOs by Chinese companies. Global investors will become far more cautious about investing in such companies," said one senior China-focused investment banker at a Wall Street bank.
Shareholders in Chinese unicorns are also worried that soggy performance of many Chinese listings in the United States could also dent their portfolio firms' IPO prospects.
While the Nasdaq Composite has gained 15.2% over the past two years, the Nasdaq Golden Dragon China Index, which tracks Chinese firms listed on the exchange, has dropped by the same amount.
"Some existing investors now would rather exit earlier than wait any longer for portfolio firms to go public," said Zhou Liang, head of UniSharesClub, a private shares trading platform of investment bank China Renaissance. "A bird in the hand is worth two in the bush."