Driven by regulatory uncertainties and stricter accounting rules in the US, as well as swaying geopolitical winds, an increasing number of Chinese companies listed in the United States are retreating to Hong Kong, and more are planning to follow suit.
The entity list, the list of military end users, and the list of Chinese military industrial enterprises have become the three main means of restricting the supply chain and financing of Chinese enterprises.
In mid-January, the U.S. government announced that nine Chinese companies, including Xiaomi and COMAC, were included in the "blacklist," one of which is listed in the U.S.
Increasingly tense Sino-US relations, coupled with Luckin Coffee’s fraud scandal, U.S. regulators are placing stricter supervision of US-listed Chinese companies. This is pushing many such companies to consider alternatives, and a relisting in Hong Kong is deemed as the best plan B.
Benefiting from the Hong Kong Stock Exchange’s 2018 regulatory change to allow company shares carry different shareholder rights, Hong Kong has already made itself an ideal destination for Chinese companies considering offshore listings.
At the same time, Hong Kong will bring a variety of opportunities to the relisted Chinese stocks: broadening of financing channels, revaluation of market value, and avoiding US risks.
Since November 2019, Alibaba took the lead in relisting in Hong Kong, followed by NetEase, JD.com, and New Oriental. A number of Chinese companies such as Bilibili, Baidu, Ctrip, Tencent Music, Vipshop, and JOYY Group are reportedly seeking a secondary listing in Hong Kong.
On January 22, according to Tencent News, Baidu had formally submitted a secondary listing application to the Hong Kong Stock Exchange, and its sponsoring teams for this listing were Goldman Sachs and CITIC.
Prior to this, Bilibili had formally submitted its listing application in Hong Kong in the second week of January.
Managing US Stock Market Uncertainties
One month after the Luckin Coffee fraud scandal broke out, the U.S. Senate unanimously passed a vote on the "Foreign Company Accountability Act," which puts forward stricter regulatory requirements in auditing and providing proof of government ownership.
This bill is considered to be extremely challenging to US-listed Chinese companies. The news led to Chinese stocks such as Alibaba, Baidu, and JD fell by 6%-10%. If companies cannot meet the inspection requirements of the PCAOB in a timely manner, they may be forced to be delisted.
Until December 2, 2020, this bill was formally passed by the U.S. House of Representatives, and then signed by former president Donald Trump.
On January 15, according to Reuters news, the US government included 9 Chinese companies on the blacklist "related to the Chinese military", including US-listed Chinese company Luokung Technology, a Chinese data firm.
American investors are required to sell their shares in "blacklisted" companies before November 11. Since last year, the US government has been continuously expanding the "blacklist" to include more Chinese companies, who are forced to think of alternative plans in the case of being included on the blacklist or any other unforeseen risks.
A secondary listing in Hong Kong can eliminate risks to a certain extent. If a company’s stock price is affected by U.S. regulation, it can exchange shares between American Depositary Receipts (ADR) and the corresponding Hong Kong stocks.
Benefits Of A Hong Kong Listing
In addition, the Hong Kong stock market has many advantages. First of all, companies tend to have lower price-earnings ratios in the United States. If a company switch from US market to Hong Kong market, it will help raise its share prices because of higher price-earning ratios given to companies listed in Hong Kong.
For example, Baidu, whose market value in US stocks has been in a relatively sluggish state for a long time. Baidu’s stock price reached US$280 at its peak in May 2018, and has been falling since then, and fell to more than US$100 in 2020, less than half of its peak level.
The reason for this is that in addition to the slowdown in Baidu’s core business growth and the difficulty of making profits in new businesses, Baidu also faces competition for US investors from the likes of Google and Facebook.
The return to Hong Kong stocks will give Baidu more room for financing channels to develop artificial intelligence and other businesses. Hong Kong and Mainland investors will understand Baidu’s market position and company size better, which will help them obtain a more favorable market valuation.
US-listed Chinese stocks that have completed their secondary listings in Hong Kong have all received varying degrees of price appreciation except NetEase.
In the future, Hong Kong listed shares are expected to benefit from Southbound Stock Connect programs that will channel mainland capital to Hong Kong.
According to a CICC research report, from the beginning of the year to January 19, more than RMB150 billion yuan of mainland funds have continued to flow into Hong Kong stocks through the Shanghai-Hong Kong Stock Connect.
Risk Considerations
However, Chinese stocks seeking a relisting in Hong Kong are not without risk factors.
Domestic investors have a more intuitive evaluation of the performance of Chinese stocks. If negative events occur, they are more likely to move quickly and the market value of these stocks will be volatile.
In addition, according to a Wall Street report on January 12, the trading documents released by the Hong Kong Stock Exchange on Sunday showed that due to US sanctions, US issuers Goldman Sachs, Morgan Stanley and JP Morgan Chase will cancel nearly 500 Hong Kong-listed products, including structured products such as warrants and CBBCs.
Some of these products are linked to the Hong Kong benchmark Hang Seng Index and the Hang Seng China Enterprise Index. The world is worried that this may have a certain impact on the inclusion of Chinese stocks.
The Hong Kong Stock Exchange issued a statement in response, saying, "We believe that the relevant actions will not have a significant adverse impact on Hong Kong. At present, there are more than 12,000 structured products listed in our market."
Not only US issuers, overseas investors may also affect the investment sentiment in Hong Kong stocks. According to the Zhongshan Securities Research Institute report, as of 2019, the proportion of overseas investors in Hong Kong stocks in Europe and the United States accounted for more than 50%, and the proportion of mainland Chinese investors has continued to increase in the past decade, but only accounts for about 30%.
There are many uncertainties in the Hong Kong stock market, but overall it is undoubtedly the best plan B for US-listed Chinese companies.
