Stifled by the Donald Trump administration’s moves to crack down on US-listed Chinese companies, many of them have opted for a secondary listing closer to home in recent times.
This homecoming trend, though, is not entirely attributable to Sino-US tensions and will continue regardless of the outcome of the November 3 US presidential election, say analysts. Nevertheless, a Joe Biden victory would mean a less hostile regulatory environment for US-listed Chinese companies.
“Chinese firms’ fervour for a US listing has long gone. The unfriendly Trump administration and rising geopolitical uncertainties are merely catalysts,” Xia Chun, chief economist of Shanghai-based wealth and asset management service provider Noah Holdings Limited, told DealStreetAsia.
“It is already a trend for quality… eligible US-listed Chinese firms want to pursue a better valuation elsewhere. The Hong Kong secondary listings of firms like Alibaba, NetEase, and JD.com were decisions made after thorough consideration and preparation, rather than a provisional arrangement solely driven by tightened listing rules [in the US].”
Seven US-listed Chinese firms have raised a combined $13.1 billion from Hong Kong IPOs in the first three quarters of 2020, according to statistics from financial data provider Wind, following in the footsteps of e-commerce behemoth Alibaba, which made a $12.9 billion secondary listing in the city board in November 2019.
The number of secondary listings by US-listed Chinese firms rose sequentially in every quarter of 2020, and numbered five in the third quarter — delivery service ZTO Express, e-commerce service Baozun, biotech firm Zai Lab, franchised hotel Huazhu Group, and restaurant operator Yum China.
Geopolitical risks: Important but not decisive
The attitude of the Trump administration towards Chinese technology companies — who once considered the US as a top IPO destination — has been confrontational.
The US Senate passed the Holding Foreign Companies Accountable Act (HCAA) on May 20 — a bill that still awaits a vote in the House of Representatives before it can be signed into law. The draft legislation requires US-listed Chinese firms to be audited in the US. Refusal to allow audit inspections by US authorities for three consecutive years would lead to a trading ban on their shares.
The law was introduced in the wake of China-based Luckin Coffee’s accounting scandal, where the firm’s executives fabricated over $300 million in revenue. The firm confessed to billions of yuan in fake sales in early July 2020, a few days after it was forced to delist from Nasdaq just 13 months after its IPO.
Political risks “are always particularly important factors to consider in all business decisions,” said Xia. “Many PE managers claim to be focusing on the business and its long-term development while thinking less of short-term factors. But they do pay close attention to how political uncertainties could impact listings, privatisations, and other forms of deals…The influence of political factors is not as much as economic factors. But I would say at least 30 per cent [of decision-making is based on it].”
The US is just hours away from declaring its president-elect, and many wonder if the election outcome could ratchet up more Sino-US tensions, forcing Chinese companies to look for capital elsewhere. While Trump has spared no effort to tame Chinese companies, Biden’s policies will be far from a U-turn.
“If Biden wins, his general policies towards China will be more or less similar to Trump’s, which is still to curb China’s development. But Biden would use more old-fashioned, diplomatic approaches, unlike Trump who uses executive orders to impose an all-round crackdown on China,” said Xia. “I don’t think Biden will meddle in China’s investments in US or vice-versa unless the deal concerns national security.”
Meanwhile, Biden has received strong support from Wall Street and technology firms over the course of his campaign, he added, “A Biden presidency could be potentially like the [Bill] Clinton or [Barack] Obama administration… when there was more clarity and stability in US-China relations, and the PE and IPO developments in the two countries.”
Homecoming for higher valuations
Chinese companies’ departure from the US stock market started well before the trade disputes. Between 2005 and 2019, 272 Chinese issuers left American stock exchanges through a delisting or privatisation, according to Wind. Last year, 32 Chinese firms completed IPOs in the US, down from 43 in 2018.
The trend of more homecoming secondary listings will continue and potentially intensify in Q4 and 2021, as China-based firms feel “more welcomed” in the home market, Bruce Pang, head of macro and strategy research at Hong Kong-listed investment bank China Renaissance, told DealStreetAsia.
“Based on historical data, we found that returning companies may achieve higher valuations and better liquidity upon stronger investor interest,” Pang added. “Investors’ valuation of Chinese ADRs [American depositary receipts] varies by sector. For the IT and communication services sectors, ADRs generally have the lowest valuation levels, compared with those of the STAR market, [Shenzen’s] ChiNext board, and H-shares [shares of mainland China companies listed in Hong Kong].”
Chinese domestic public markets have grown more attractive in the last two years. In the first three quarters of 2020, China’s Nasdaq-style STAR Market in Shanghai saw 113 listings of domestic issuers that raised $26.9 billion in total, making it the most popular IPO location for homegrown companies.
The STAR Market, which opened in July 2019 as part of Beijing’s broader reforms of the country’s financial markets, has so far welcomed the IPOs of 191 Chinese companies with a combined market capitalisation of almost 3 trillion yuan ($448.6 billion) as of October 30, according to official statistics.
Hong Kong came second with 87 listings and over $27 billion in total funds raised across the city’s main board, as well as growth enterprise market (GEM) that targets small- to medium-sized firms. Big-ticket secondary listings raked in roughly half of the proceeds in the first three quarters of this year.
The special-administrative region is poised to attract more US-listed Chinese firms. eligible for secondary listing through a series of reforms. This includes allowing corporate entities to benefit from a corporate weighted voting rights (WVR) structure, in an attempt to add diversity to an exchange once dominated by financial services and property issuers. The number of such companies stood at 42 as of June 2020, according to investment bank UBS.
“Hong Kong has a comparatively low proportion of new economy stocks relative to many major exchanges. However, with the help of the new listing regime, together with some mega-IPOs in the pipeline and the potential for returning Chinese ADRs, the portion of new economy stocks in the Hong Kong market based on market cap rose 7 percentage points to 30 per cent since 2017, we calculate,” said China Renaissance’s Pang.
“We estimate HKEX may see a rise in the share of new economy stocks (based on market cap) to higher than 35 per cent of listed companies in the next three to five years,” he added.
Pang, however, is of the opinion that despite the trend of Chinese companies seeking capital back home, the US market will remain a major IPO destination.
Wind data shows that 26 Chinese IPOs in the US have collected about $8.2 billion in the first three quarters of 2020. Although they were only 6.4 per cent of the number of all Chinese IPOs and 9.5 per cent of their total funds raised across boards in Greater China and the US, the proportion of large-cap Chinese IPOs increased significantly since the start of Q3.
August, in particular, had the $1.5 billion IPO of electric vehicles maker Xpeng Motors and the $2.1-billion IPO of KE Holdings, a real-estate brokerage platform also known as Beike Zhaofang.
“The US is long seen as a highly liquid venue that may help in boosting a company’s attractiveness and investibility for investors,” said Pang.
“Also, companies with special structures, such as the corporate entities’ WVR, are still not eligible to be listed in Hong Kong unless the city’s recent consultation yields a positive outcome. This makes the US a competitive listing destination for many Chinese unicorns,” he said, referring to 42 of the current top 50 unlisted Chinese unicorns who adopt such structure.
Secondary listings in Hong Kong (Between Q4 2019 and Q3 2020)
|Symbol||City||Company Name||Listing Date||Funds Raised (Million USD)||Industry|
|2057.HK||Shanghai||ZTO Express (Cayman) Inc.||2020-09-29||$1,265.6||Transportation|
|9991.HK||Shanghai||Baozun Inc.||2020-09-29||$427.8||Software & Services|
|9688.HK||Shanghai||Zai Lab Limited||2020-09-28||$766.0||Pharmaceuticals, Biotechnology & Life Sciences|
|1179.HK||Shanghai||Huazhu Group Limited||2020-09-22||$782.5||Consumer Services|
|9987.HK||Shanghai||Yum China Holdings, Inc.||2020-09-10||$2,227.7||Consumer Services|
|9999.HK||Hangzhou||NetEase, Inc.||2020-06-11||$3129.0||Software & Services|
|9988.HK||Hangzhou||Alibaba Group Holding Limited||2019-11-26||$12,932.9||Retailing|