Expect not just more secondary listings in Hong Kong, but also US delistings and Hong Kong relistings, writes Kenneth Lee.
The recent filing by Ant Group, the financial affiliate of Alibaba, to list its shares in Hong Kong and on Shanghai's Star Market, China's Nasdaq-like tech board, comes after a study highlighted 31 US-listed Chinese companies that could flock to the Hong Kong bourse. This has been a long time coming, with the fallout from several US-listed Chinese companies, most notably those exposed by Muddy Waters early last decade.
Alibaba's secondary listing in Hong Kong last year essentially set-off a repatriation trend. Just this past June we saw two Chinese technology giants, NetEase – one of the world's and China's largest mobile games publishers, and JD.com – an e-commerce behemoth by many measures, choose Hong Kong for their secondary listings, raising some US$6.7 billion. In the short-to-medium term, more of these secondary listings in Hong Kong – or complete US-delisting and HK-relisting, are expected.
This is something that Hong Kong Exchanges & Clearing (HKEx) and the Hong Kong government are very keen to realise to see their recent market reforms come to fruition, with a strong emphasis on leading sectors such as technology, biotech and life sciences. There's also the introduction of Weighted Voting Rights Structures or dual-class shares, which had long been a critical determinant of the listing jurisdiction for these sectors.
In light of the current US-China situation, we are anticipating more (if not accelerated) repatriation activities over the next 12 to 24 months.
A wide array of factors and considerations affect a company's choice of jurisdiction in which to float their shares. A key consideration for many companies, particularly for their initial share offering, is pricing/valuation, of which the interest of the general investing public is vital.
For the past few decades, the US has dominated and is the clear global leader in the listing of technology stocks, with an exceptionally diverse base of investors and investment managers, many of which have significant interest in this sector resulting in higher multiples and greater liquidity. However, investor interest in the US – and the resulting effect on a company's share price – had been declining over the years for Chinese issuers, especially those with very little or no operation outside the mainland. In April this year, the circumstances surrounding the Nasdaq-listed Chinese coffee chain Luckin Coffee had undoubtedly reminded US investors of the accounting scandals of Chinese companies that had plagued the US markets earlier last decade, and the risk of investing in small and relatively unknown Chinese enterprises.
The return of US listed Chinese companies to the Hong Kong market is driven by many factors, including the declining interest and valuation in the US as noted above. However, some would argue the biggest factor is probably geopolitics, especially with recently renewed comments from President Trump on the tightening of control over Chinese companies listed in the US, and the introduction of the Holding Foreign Companies Accountable Act, which would give greater powers to US authorities over the access of potentially sensitive information of foreign companies listed in the US, and the potential of being delisted. This is exceptionally concerning, as these measures predicated the abrupt shut-down of the respective consulates in Houston and Chengdu, along with the worsening of the US economy and the continued spread of Covid-19.
The rising tension between the two nations – beginning with the trade issues early last year and many of the consequential actions, has undoubtedly influenced the decision of Chinese issuers who are leaving or seeking a secondary listing in Hong Kong. It's a market much closer to home, where investors and regulators have a much broader and commercial understanding of the mainland Chinese market.
The collaboration and increasing connections between the Hong Kong and PRC capital markets as well as the two economies also adds to the attractiveness of returning to the Hong Kong bourse.
It also provides greater access to mainland Chinese institutional and retail investors, who have some equity participation opportunities in many of these industry-leading Chinese companies.
Historically, Hong Kong has always been a leading choice for Chinese enterprises to undergo their initial public offerings (IPOs), mainly due to the significant international investor interest that HKEx can attract, and their participation, providing comparatively attractive pricing for issuers and liquidity of their stocks. Given the limited access global investors have to the mainland Chinese market, Hong Kong presents itself as the dominant jurisdiction for Chinese companies, further driving international interest in this market. However, it is really due to the many critical reforms that HKEx has undergone in the past couple of years that have provided a strong impetus for many leading Chinese technology companies listed in the US to return (or at least partially) to Hong Kong. When many of these technology companies initially launched their IPOs years ago, Hong Kong was fundamentally not ready, most notably in the area of the weighted voting rights and dual-class shares structures, which are common features with technology companies but only recently introduced with Xiaomi as the first listed company leveraging this feature.
Industry participants generally expect there to be more such returnees over the coming 18 – 24 months, given the tension, while the process of undergoing such a secondary listing is not that much more complicated or overwhelming than what Chinese issuers endured the first-time. These issuers, its management and key talents would have considerable familiarity with the IPO process already, while its internal systems and IT processes will be considerably more ready to generate the required information for public disclosure purposes for the secondary listing as well.
Another plus for Chinese companies moving closer to home is that the ongoing compliance and maintenance in general is higher for US listings compared to Hong Kong, although that would not apply to secondary listings since the listed issuers would need to abide by the rules in both jurisdictions – a nominal cost, considering the potentially substantial proceeds that can be raised in these secondary listings.
In the near-term, this is as far east as we can see for US-listed Chinese companies "moving" back to Asia. It will be interesting to see when we may see the formidable trend of returning to China and the A-share market. This is likely just a matter of time, and we have already seen some cases of it - not necessarily from the US, but from other markets including Hong Kong. In recent years, a lot of start-ups have in fact abandoned their off-shore structures and plans to list in foreign markets as well. Until there are more market reforms in the mainland, Hong Kong, in the near-medium term, will continue to benefit from this Go-East trend.
A version of this article was originally published by South China Morning Post.
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