Nasdaq gets tough on small Chinese IPOs, as an AI-fueled energy storage boom takes off – Bamboo Works

By Doug Young & Rene Vanguestaine

Two powerful forces are currently reshaping the landscape for Chinese companies in global capital markets. The first is a long-overdue regulatory tightening by the Nasdaq, aimed at curbing a flood of small, problematic IPOs from China that have plagued the exchange for years. At the same time, a sudden, frenzied investor rush into the energy storage sector — a boom fueled by the immense power demands of the AI revolution — is creating a new frontier of opportunity and potential speculative excess.

For years, we have watched as a parade of small Chinese companies completed IPOs on the Nasdaq, and we could not always understand why the exchange was so willing to accommodate them. The exchange first detailed its new, tougher stance last month. Under the proposed rules, which are still being vetted, new listings from all offshore companies will need to raise a minimum of $25 million and maintain a public float of at least $5 million. While technically applicable to all foreign firms, these rules appear squarely aimed at the wave of small Chinese IPOs that have occurred since 2020.

This move by Nasdaq is, in our view, a necessary and belated response to a pattern of highly problematic listings. Since 2021, the U.S. has seen between 20 and 50 such IPOs annually, typically raising trivial sums — often less than $10 million. These deals were frequently brought to market by third-tier underwriters who, as we’ve been told by company CFOs, brought virtually no U.S. investors to the table. The offerings were cobbled together with “friends and family” money from the Chinese companies, resulting in tiny public floats that were extremely vulnerable to price manipulation.

The consequences have been damaging. We have seen numerous cases where a stock’s price would skyrocket upon trading, only to collapse days or weeks later, leaving retail investors with substantial losses. The most egregious example was AMTD, a Hong Kong financial firm that listed in 2022. Its stock price surged an unbelievable 21,000% in a short period before crashing back to earth, where it now trades for about $1 a share.

This isn’t the first time this has happened. A similar wave of so-called reverse takeovers by Chinese companies in the 2000s ended disastrously, with investors losing billions. For a market that prides itself on protecting individual investors, we are amazed it has taken so long for regulators and the exchange to act decisively.

This crackdown is the latest nail in the coffin for the once-thriving pipeline of Chinese IPOs in the U.S. That pipeline was already under pressure due to Beijing’s clear preference that its tech champions not list in America, where they are subject to U.S. oversight. This was underscored when China’s state-owned enterprises voluntarily delisted from U.S. exchanges to avoid scrutiny. While Nasdaq’s mission to nurture small, growing companies is admirable, applying that mission to firms from a vastly different regulatory and economic environment without proper safeguards has proven to be a mistake. The market is now correcting for it.

AI sparks an energy storage gold rush

As one door for Chinese capital-raising closes, another is swinging wide open. A new class of companies involved in energy storage is capturing the market’s imagination, driven by the AI revolution. As we wrote recently, firms like Hithium, an energy storage systems maker preparing to list in Hong Kong, and Sungrow, a solar equipment maker touting energy storage as its next growth area, are in the spotlight.

The connection is straightforward: AI applications are hosted in data centers that consume enormous amounts of power. To meet sustainability goals, these centers are increasingly powered by on-site renewable sources like solar. But to ensure uninterrupted, 24/7 operations, excess power generated during the day must be stored in batteries for use at night or on cloudy days.

While the technology is undoubtedly important, we believe investors should be wary. There are signs that a bubble is forming around all things AI, and at some point, the returns may not justify the massive investments being made. If that happens, the forecast demand for energy could prove to be inflated.

Furthermore, energy storage is a scale business. A number of major, well-established solar companies — such as JinkoSolar, Trina Solar, and Canadian Solar — already have energy storage business lines, deep technological know-how, and global production facilities. Newcomers will face intense competition from these giants. Investors must carefully assess whether a new listing has a realistic chance of success in such a crowded field.

Unsurprisingly, China appears poised to dominate this emerging sector, thanks in large part to massive government support. This is a natural extension of Beijing’s strategic push to build a world-leading battery industry. However, history suggests that such dominance is not permanent. Technology evolves, and if one nation abuses its position, other countries will eventually find a way to develop the technology they need.

We see a parallel in the rare earths industry. For decades, the U.S. was content to rely on foreign sources. But with its back against the wall geopolitically, the government and private companies are now scrambling to build a domestic supply chain. Europe is making a similar effort to ensure its solar industry does not die. Eventually, geopolitics and national interest compel countries to act. While China’s state-sponsorship may give it a powerful head start in energy storage, other nations will inevitably work to secure their own footing in a technology this critical to the future.