HONG KONG (Reuters Breakingviews) - Beijing’s unicorn banker wants to run with the crowd. China Renaissance, a boutique advisory shop run by former Morgan Stanley rainmaker Fan Bao, just unveiled blueprints for an initial public offering in Hong Kong. Some of its tech-titan clients such as Meituan Dianping are doing the same. Slow revenue growth and a small bottom line, however, make the mooted valuation look punchy.
China Renaissance works with the country’s hottest startups. It advises the likes of ride-hailing titan Didi Chuxing and has been helping e-commerce giant JD.com raise money for years. It also manages private equity funds and is building an onshore securities business that’s growing at a similar pace to its customers. Revenue in the division swelled to $12 million last year, six times more than in 2016.
Also like many a startup, China Renaissance has little profit to show. It earned $32,000 last year and lost $65 million in the first quarter, following heavy investment in areas including its new brokerage operation. The mix of businesses can make comparisons difficult. Assume, however, that earnings return to 2016 levels of $32 million, and at the bottom end of a $4 billion to $5 billion valuation target range reported by Reuters, it would represent an absurd multiple of 125 times.
Generously using a first-quarter $35 million adjusted net profit figure, which includes unrealised income from private equity investments, and annualizing it would value China Renaissance at 29 times. U.S. boutiques PJT Partners and Moelis – as well as Chinese money manager Noah – all trade at about 21 times their expected earnings for the next 12 months, according to Eikon.
Those rivals have something in common that makes them less risky: they’re not focused on one sector. And though he opened his shop in 2005, Bao will have to be careful to avoid the fate of Silicon Valley’s Four Horsemen: Alex. Brown, Hambrecht & Quist, Montgomery Securities and Robertson Stephens. They underwrote some of the biggest dot-com deals of the 1990s, but were swallowed up and mostly disappeared.
Juggling its own IPO while simultaneously working on myriad technology market debuts could also be a challenge. If nothing else, the enthusiasm for new tech stocks means China Renaissance could benefit from an investment halo effect.
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