Is This The Right Time For A Chinese IPO In US? Kingsoft Cloud Will Soon Find Out

Despite the ongoing coronavirus pandemic, rising tensions between China and the U.S. and market volatility, a Chinese cloud computing firm is preparing to launch an initial public offering on the Nasdaq exchange,

Kingsoft Cloud, which is being spun off from Hong Kong stock exchange-listed Kingsoft Corp., will offer of 25 million American Depositary Shares priced at between $16 and $18 each.

From this sale, Kingsoft Cloud expects to generate net proceeds of between $392 million and $451 million. The company would then have a market value of between $3.6 billion and $3.8 billion.

Kingsoft Cloud plans to use net proceeds from the offering to upgrade and expand its infrastructure, and to further invest in technology toward artificial intelligence, big data, cloud technologies and internet of things.

Kingsoft Cloud said on Tuesday that it expects the offer to price on Thursday. Shares will begin trading on the following day under the symbol “KC.”

It will be first IPO by a Chinese company in the U.S. since Luckin Coffee (LK), which has since been ensnared in a massive fraud scandal. Luckin shares have plunged almost 90% in 2020.

Since the Luckin scandal, Chinese companies trading in the U.S. have come under closer scrutiny.

“There is no doubt that the Luckin debacle has put a cloud over the Chinese IPOs in the pipeline, but the interest for Chinese companies to list here in the U.S. remains strong,” said Jason Ye, at New York law firm Ortoli Rosenstadt, which advises Chinese companies on IPOs.

Last month, the U.S. Securities and Exchange Commission and Public Company Accounting Oversight Board warned investors about Chinese companies’ flimsy bookkeeping standards, which they said create “substantially greater risk that disclosures will be incomplete or misleading.”

After Luckin Coffee admitted that its employees had inflated sales figures, another Chinese company, TAL Education (TAL), a Beijing-based operator of tuition centers listed on the New York Stock Exchange, also revealed fraudulent sales figures by its employees.

But Jason Elder, a partner at the Chicago-based law firm of Mayer Brown, said the timing of the Kingsoft Cloud IPO was actually ideal since demand for cloud services has escalated as more people stream content as they work from home during the pandemic.

“The cloud business is very appealing in today's market,” he said. “It makes sense that they would take this opportunity.”

Kingsoft Cloud said it generated revenues of about $561 million last year, although it posted a loss of $156 million.

Its estimated revenue for the first three months of 2020 was between $191.2 million and $198.3 million, an increase of more than 60% year over year.

“There will always be a pipeline of Chinese companies which would prefer a listing in the U.S. over Hong Kong and China, as the U.S. presents a better option for [smaller] issuers due to their better liquidity for smaller-cap companies,” said Jeffrey Sun, a partner at the law firm of Orrick in Shanghai.

Kingsoft Cloud’s parent Kingsoft Corp. and other existing shareholders, Chinese electronics company Xiaomi and French fund manager Carmignac Gestion have agreed to purchase up to $125 million worth of shares in the offering.

Xiaomi founder Lei Jun is chairman of Kingsoft Corp.

“Given the current market volatility and the coronavirus, the presence of anchor investors definitely would help the success of IPO,” added Sun. “Investors looking at potentially investing in the deal would view that they are following the smart money if the deal is supported by anchor investors.”

JPMorgan, UBS, Credit Suisse and China International Capital Corp. will serve as joint lead underwriters for the IPO.