Almost a decade after accounting scandals nearly shutdown the pipeline for Chinese company listings in New York, the market for initial public offerings (IPOs) via American depositary receipts (ADRs) is facing headwinds once again. And while old-fashioned fraud is nothing new, this time it’s escalating US-China trade and political tensions that are the culprits.
As a result of these tensions, Hong Kong looks set to become the preferred alternate venue for Chinese companies seeking a secondary listing, a sort of plan B that allows them to hedge their bets on the political front and raise capital at the same time, even if they aren’t strapped for cash.
Netease and JD.com, which have filed for listings in Hong Kong, are flush. Netease, as of March 31 2020, has US$16.8 billion in cash and cash equivalents; JD.com has US$6.1 billion of the same.
On June 7, Netease priced its Hong Kong offering at HK$123 per share (US$15.77) to raise a total of US$2.7 billion before the exercise of the over-allotment option. Investment broker CICC, Credit Suisse and JPMorgan acted as joint sponsors. Its share price will debut on June 11 2020. Seventeen other US-listed companies are considering following suit.
The trigger for the hand-wringing is an old-fashioned accounting sleight-of-hand. On April 2, Luckin Coffee, touted as the technology-driven coffee retailer that is seen as a rival of Starbucks in China, admitted – after an extensive short sell report by Muddy Waters prompted a review by a special committee set up by the firm board of directors – that sales records from the second quarter of 2019 had been fabricated.
On April 21, US Securities and Exchange Commission issued a statement saying that “in many emerging markets, including China, there is substantially greater risk that disclosures will be incomplete or misleading and, in the event of investor harm, substantially less access to recourse, in comparison to US domestic companies”.
On May 20, the US Senate passed the Holding Foreign Companies Accountable Act, legislation that, if signed into law, will require foreign companies listed on US exchanges to certify that they are not owned or controlled by a foreign government, and to pass an audit conducted by the Public Company Accounting Oversight Board.
Currently, 234 Chinese companies have US exchanges as their major listing venue. And, 19 of them, with a total market cap of US$340 billion, according to research by CICC, are eligible for secondary listing in Hong Kong, and they could raise as much as US$34 billion assuming 10% new issuance. Alibaba was the first Chinese company to tap Hong Kong for secondary offerings under the Hong Kong Exchange and Clearing’s (HKEX’s) 2018 relaxed listing rules.
The new rules, designed to help the HKEx better compete with US exchanges, allowed, among other things, the listing of companies with weighted voting right (WVR) structures – something permitted in the US – and a new concessionary secondary listing route for Greater China and international companies intent on a secondary listing in Hong Kong. The changes have proven to be well-timed.
In 2019, Hong Kong lifted the global IPO trophy beating US rivals, Nasdaq and NYSE (New York Stock Exchange) with a total of US$39.5 billion raised, according to a KPMG report. The HKEx’s performance was boosted by the secondary listing of Alibaba, which raised US$11 billion, and also the IPO of AB InBev’s Asia business, Budweiser Brewing, which raised US$5 billion. Among the 184 new listings in 2019 in Hong Kong, 169 were main board listings, mostly comprised of retail, consumer goods, and services companies.
For US-listed Chinese companies, returning to Hong Kong means a new liquidity source for future fund-raising activities. In the meantime, the strong secondary listing pipeline is likely to further beef up HKEx’s equity product offerings, boosting its equity and equity derivatives trading volume.
In anticipation of brightening prospects for the Hong Kong capital market, MSCI, the US-based global index provider, signed an agreement on May 27 with HKEX to license a suite of MSCI indices in Asia and emerging markets for the introduction of 37 MSCI equity index futures and options contracts in Hong Kong. Starting 2021, MSCI will stop licensing most of its derivatives products on the Singapore Exchange’s platform.
In mid-May, Hong Kong’s Hang Seng Index announced the inclusion of companies with WVR and those with secondary listings, as constituent stocks. The decision is set to pave the way for technology companies with WVR structure or secondary listings in Hong Kong to be included in the index. Both Baidu, seen as China’s Google, and Netease have WVR structure.
It is not only the US exchanges that Hong Kong has to contend with. The Shanghai Stock Exchange is also proactively luring Chinese new economy issuers for listing. It launched the Science and Technology Innovation Board, STAR Market, in July 2019.
So far, the so-called Nasdaq-style exchange, has successfully raised 82.4 billion yuan (US$11.6 billion) for 70 high-tech innovative companies, including Xiaomi-backed Roborock Technology, a robotic vacuum cleaner. As well, Semiconductor Manufacturing International Corporation, China’s largest chip maker, has filed for a secondary listing on the STAR market to raise 20 billion yuan (US$2.8 billion) amid US sanctions on Huawei.
“China could top the global IPO market as work resumes after Covid-19 lockdowns and on reforms which could expedite listings on Shenzhen's ChiNext board,” notes Sharnie Wong, a senior analyst at Bloomberg Intelligence. “Chinese technology giants may shift to Hong Kong from the US after threats from the Trump administration to delist Chinese companies and as tensions flare over the pandemic.”