Cover Series: Didi Probe Has Domino Effect on China Tech’s Overseas IPO Plans (Part 4)

Several data-rich Chinese firms have now suspended their planned overseas listings after the national security probe of Chinese ride-hailing giant Didi was announced this month.

On Friday, markets were chilled by news China’s powerful Ministry of State Security, alongside six other government agencies, had stationed investigators inside the company in order to probe potential cybersecurity risks.

But as the fallout continues, questions are swirling about another giant company which pulled its IPO earlier this year: ByteDance Ltd. The company is best known for global sensation TikTok, which this week became the first app not owned by Facebook Inc. to surpass 3 billion downloads globally.

Was ByteDance spooked?

Among Chinese firms, ByteDance is now second in private valuation only to Ant Group, the fintech giant that saw its IPO knocked on the head last year over financial risk concerns. And users are spending far more on its short-video platforms than ever before.

In early April, Caixin reported that ByteDance planned to submit an application to the Hong Kong Stock Exchange to list in the second quarter. The firm, with a private valuation of some $300 billion, was going to shun the U.S. financial markets amid ongoing political tensions with China.

That came a month after the firm fueled speculation when it snagged the head of smartphone giant Xiaomi Corp.’s international business, Chew Shou Zi, to become its chief financial officer. Chew oversaw Xiaomi’s IPO as its chief financial officer in 2018.

ByteDance was oddly quiet about the rumors. Then, at midnight on April 23, the firm released a brief statement: “After a thorough study, we believe the company currently doesn’t meet the conditions for a public listing.”

A month later, ByteDance CEO Zhang Yiming announced he was stepping down from his role. Zhang said in a statement that he would remain at ByteDance and focus on “longer-term initiatives” after stepping back from day-to-day responsibilities. He did not say whether he would remain CEO, nor specify what form his new role would take, but hinted that he may focus on social impact.

Insiders and experts say ByteDance’s cautious approach reflects the regulatory complexity in China, the U.S. and Europe toward cross-border data flows that could limit the global expansion of China’s tech firms. Unlike Didi Chuxing, which collects domestic data, TikTok’s status as a global phenomenon makes its position particularly precarious.

In August 2020, when it was being targeted by the Trump White House, ByteDance planned to sell its U.S. operations to Microsoft to avoid a regulatory crisis. Around the same time, China’s commerce and technology ministries revised the catalog of technologies subject to export bans or restrictions, adding “personalized information push service technology based on data analysis” and “artificial intelligence interactive interface technology” — two technologies central to TikTok.

The move left ByteDance squeezed between two administrations, and effectively meant Beijing would have to sign off on any ByteDance stake sale. Ultimately, TikTok remained in Chinese hands.

According to financial data released by the privately held firm, last year ByteDance made 236.6 billion yuan ($36.5 billion) in revenue, a year-on-year increase of 111%. Despite its high salaries and flashy investments, the firm had yet to turn a profit as of last year, reporting a loss of some 14.7 billion yuan for 2020.

But the firm’s monthly active users at the end of last year were around 1.9 billion, covering more than 150 countries and regions, and in 35 languages.

IPOs fall like dominoes

“Didi Chuxing has opened the Pandora’s box,” said one U.S. investor. “Wall Street needs to reappraise the overall risk of China concept stocks.”

Alibaba-backed medical services provider LinkDoc Technology Ltd. was the first firm known to have pulled its planned U.S. IPO in the wake of the Didi probe. Medical companies that want to list abroad should work closely with regulators to make sure they’re not crossing any national security lines, a lawyer specializing in the field told Caixin.

The latest round of cybersecurity reviews into data-rich platforms in different sectors may not only hurt the confidence of medical firms’ investors, but also imply regulators’ preference that companies seen as presenting potential national security and biosecurity risks list at home, Zhang Wenbo, a senior lawyer specializing in life science and health care, told Caixin.

Several other firms with U.S. IPOs in the works have now suspended them. The audio content platform Ximalaya and the platform-as-a-service supplier Qiniu Cloud, which both filed prospectuses on April 30, have made no comments since. “Ximalaya has almost abandoned its U.S. IPO plan and may seek a listing in Hong Kong,” a source with knowledge of Ximalaya’s operations told Caixin.

Shanghai Renyimen Technology, the company behind the Soul dating app, had updated its pricing range when it suddenly announced an investment from Tencent the same week it had planned to list, before pulling its IPO on June 23. Hello Inc., which filed on April 24, has also put its plans on hold.

“Right now, content platforms, media platforms and large data exchange platforms are all facing similar regulatory risks if they want to list overseas. The regulations will certainly keep changing,” said one securities trader who Caixin chose not to name because of the sensitive nature of regulatory proceedings.

Most Chinese tech companies that might want to list soon easily pass the inspection threshold announced in a new draft revision to the cybersecurity review measures, which say any Chinese company that holds the personal information of 1 million or more users would have to seek a government review before listing abroad. Companies should provide their prospectuses to the Cybersecurity Review Office, the office of the internet watchdog that conducts cybersecurity reviews, the draft shows.

According to their prospectuses, Ximalaya, Soul and Hellobike counted 250 million, 33.2 million, and 21.8344 million monthly active users respectively in the first quarter. Ximalaya was one of 11 firms, including ByteDance and its short video rival Kuaishou, hauled in by the Cyberspace Administration of China (CAC) and the Ministry of Public Security in March for a dressing down about the spread of “deep-fake” technology. In October 2019, the CAC removed Soul from app stores for violating content guidelines.

This is the fourth in a series of stories about the regulatory storm that followed Didi's IPO. Click to read part one, part two and part three.

Contact reporter Flynn Murphy (flynnmurphy@caixin.com) and editor Joshua Dummer (joshuadummer@caixin.com)

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