As December rolls in, a noticeable trend emerges in the Chinese IPO landscape, marked by an influx of companies withdrawing their applications. This month alone has seen two firms halt their IPO processes, a continuation of a striking pattern that has seen over 400 companies abandon their IPO aspirations throughout the year, the highest recorded figure in recent times.

On December 1, Wuhu Jiahong New Materials Co., Ltd., dubbed "Jiahong New Materials," halted its review process. The next day, Hangzhou Feishide Technology Co., Ltd. followed suit, ceasing its application for an IPO on the Sci-Tech Innovation Board.

Insiders close to Feishide indicated that the decision to withdraw was a strategic one, reflecting the firm's internal growth goals. They hinted at plans to reapply for their IPO in the future.

Data released by the Shanghai and Shenzhen stock exchanges reveal that as of December 3, 2023, a staggering 428 companies have withdrawn their IPO applications, marking a 75% increase compared to the same period last year.

What then lies ahead for these companies whose IPO efforts have stumbled? Industry insiders have noted a sharp increase in mergers and acquisitions involving these withdrawn firms. A prominent investment banker shared that these companies are generally more mature and clearer in their operational structures, thus making them quicker and more seamless targets for acquisition.

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The Director of the Financial Development Research Institute at Nankai University highlighted that companies terminating their IPO reviews have avenues such as internal restructuring, exploring alternative funding sources, engaging in mergers and acquisitions, and potentially re-attempting their listings.

IPO Withdrawals Exceeding 400

In light of tightening IPO regulations, 2023 has seen an unprecedented number of companies pull their applications. Within just the first couple of days of December, two firms—Jiahong New Materials and Feishide—put their IPO aspirations on hold.

Jiahong New Materials suspended its review after waiting over a year for approval, while Feishide ultimately withdrew following an inquiry that yielded no developments. This trend of halting IPO applications after extended waiting periods has become increasingly common, especially toward the year's end.

For November, 12 companies were reported to have their IPO applications terminated; notably, 67% of these had been pending for more than a year before their withdrawal.

Statistical analysis shows that the figures for companies halting their IPO reviews peaked in June with 118 terminations, contrasting with lower rates in prior and subsequent months.

Compared to earlier months in 2023, where an average of about 33 companies withdrew their applications between January and April, the latter half of the year saw a drop in withdrawal rates, averaging around 19.5 per month from August to November.

The trend holds a stark comparison to previous years; in 2021, 227 companies withdrew their applications, and by 2022, the figure climbed to 288. The drastic rise of 75% in 2023 illustrates an ongoing struggle within the market.

According to industry analysis, the surge in IPO withdraws can be attributed to tighter regulatory policies, companies reassessing market conditions, shifts in capital market valuation, and increased regulatory scrutiny.

Many investment experts point out commonalities among these withdrawn firms, including insufficient financial data to meet updated IPO standards, significant declines in performance over the last year, concentrated ownership structures hinting at family dominance, and challenges faced by traditional consumer sectors entering a downturn.

However, some believe that even firms meeting performance criteria are pulling out due to insufficient growth forecasts. A shared sentiment among venture capitalists indicates that some projects have been retracted even after approval, primarily due to waning performance expectations.

What are the pathways for companies after IPOs are halted?

Companies that find their IPO processes interrupted have several options ahead of them.

According to experts, such firms may consider internal reforms, look to other channels for financing, engage in mergers and acquisitions, or strategically prepare for another IPO attempt.

Increased mergers and acquisitions reflect a shift in strategy for many firms post-withdrawal, with numerous potential IPO candidates now targeted for acquisition by listed companies, a preferred exit strategy for investment firms.

Federal guidelines indicate a clear trend; firms unable to fulfill IPO processes find themselves being actively acquired, typically by existing publicly traded entities.

Noteworthy examples include the case of Si Lin Jie, which has set its sights on acquiring Qingdao Kekai Electronics Research Institute, a firm that had previously declared an unsuccessful IPO attempt.

Kekai's IPO application was terminated in April of the current year, and just five months later, Si Lin Jie announced plans to acquire a 71% stake in the company.

Similarly, Tongwei Co., Ltd. and Yongda Co. are on record planning acquisitions of Jiangsu Runyang New Energy Technology Co., Ltd and Jiangsu Jinyuan High-end Equipment Co., Ltd., respectively, underscoring a growing trend in strategic mergers post-IPO applications.

Additionally, some firms, after terminating their IPO applications, are undertaking renewed efforts to list. For instance, Zhejiang Chen Tai Technology Co., Ltd. shifted from targeting the Sci-Tech Innovation Board to the Beijing Stock Exchange.

In a recent announcement, Chen Tai revealed it had engaged a brokerage to facilitate its public offering to unspecified qualified investors, formally initiating the listing preparation process.

Certain companies, like Jiangsu Fenghe Medical Equipment Co., Ltd., which had initially sought a Sci-Tech Innovation Board IPO, resumed plans to list on the ChiNext stock market following the rejection of their prior application.