Leading Chinese mainland enterprises, due to be delisted in New York amid an audit row with US authorities, are Hong Kong-bound, seeking a primary listing on the SAR’s bourse. It’s a hedge for them as well as a booster for a market battered by global geopolitical tensions and COVID-19. Liu Yifan reports from Hong Kong.

Some of the biggest names in the Chinese mainland’s corporate scene and listed on Wall Street are packing up for greener pastures at home as a protracted audit wrangle with United States authorities drags on.

The Hong Kong Special Administrative Region, which has been the world’s top venue for initial public offerings in seven out of the past 13 years, is at the receiving end of a growing list of homecoming big-name Chinese enterprises as they chart a new path to the city with primary listings, cementing the HKSAR’s stature as a major world financial hub.

Leading the charge has been Hangzhou-based e-commerce colossus Alibaba Group, which caused a stir when it debuted on the New York Stock Exchange in 2014, raising $25 billion — at the time the largest IPO in world history. But, less than a decade later, the technology group made an about-face, saying it planned to elevate its listing status in Hong Kong from “secondary” to “primary”. It was a strong signal to its Chinese mainland peers to follow suit in preparation for the worst of the decoupling from New York.

Unlike the group’s secondary listing status in Hong Kong since 2019 whereby the stock issuer could be exempted from full compliance with the Asian hub’s listing rules, the dual primary listing this time requires Alibaba to meet the full reporting rules of both marketplaces, resulting in additional compliance costs.

But two built-in advantages of a dual primary listing — a backup market for share sale to mitigate the risk of delisting, as well as direct access to deep-pocketed mainland investors via the SAR’s cross-border Stock Connect programs with Shanghai and Shenzhen — have made such a listing a top pick for eligible companies, even for those who have already taken a secondary listing in Hong Kong.

Sword of Damocles

Alibaba’s move proved prescient. Days after it decided to upgrade the listing status, the US Securities and Exchange Commission put the company on a swelling “watch list” of more than 150 US-listed Chinese firms that could be booted out of Wall Street in 2024 under the Holding Foreign Companies Accountable Act.

The law, which was passed by both chambers of the US Congress and signed into law by then-US president Donald Trump in 2020, empowers the US securities watchdog to delist any foreign company from US stock exchanges if they are found to have failed to comply with audit requirements of the Public Company Accounting Oversight Board, the US audit overseer, for three consecutive years.

Although talks to break the impasse are still ongoing, the uncertainties among US-listed Chinese companies are far from over. Like a sword of Damocles hanging over them, another new law looms large in the US Congress. If passed, it could even speed up the companies’ delisting timeline by a year.

In a sign of escalating tensions, five of China’s largest State-owned companies — PetroChina, Sinopec, Sinopec Shanghai Petrochemical, China Life Insurance and the Aluminum Corporation of China — announced on Aug 12 their plans to stop offering their shares in the US.

Even before the audit row reared its head, US-listed Chinese businesses had already taken a battering in New York. Since late 2020, the US has imposed sanctions barring US investors from trading in dozens of companies with alleged links to China’s military. The biggest fallout came last year, when China’s three largest telecom operators — China Mobile, China Unicom and China Telecom — were removed from the New York Stock Exchange.

“There is no so-called safe sailing for Chinese enterprises currently listed on Wall Street as long as the tensions between China and the US remain,” says Andrew Wong Wai-hong, chairman and CEO of Anli Securities in Hong Kong.

“More large-cap Chinese companies will go for a primary listing in Hong Kong, given the city’s sophisticated capital market and their eligibility for inclusion in the trading scheme that allows mainland investors to buy stocks more easily,” he says.

So far, Alibaba rival JD, as well internet company Baidu and gaming company NetEase, are among several other mainland business heavyweights with secondary listings in Hong Kong that are expected to upgrade their listings in the city. Online video platform Bilibili is already in the process of securing a dual primary listing status in the SAR.

Likely uplift

The potential influx of southbound buying following the inclusion of leading mainland companies’ shares in the Stock Connect program between Hong Kong and the Shanghai and Shenzhen bourses could give the market a timely boost.

Global investment bank Goldman Sachs expects the inflow of southbound funds to reach $30 billion should Alibaba and 14 other secondary-listed mainland companies in Hong Kong opt for a dual primary listing.

These funds would be opportune as Hong Kong’s capital market — one of the financial hub’s key pillars — has borne the brunt of regulatory scrutiny and global recessionary woes in the past few years, leaving investors out of pocket and fundraising slowed.

According to financial analytics firm Dealogic, among the 132 IPOs and secondary listings on Hong Kong’s stock exchange since the start of 2021, which raised a total of $47.6 billion, 111 of the companies’ shares are currently trading below their respective initial selling prices. So far this year, the benchmark Hang Seng Index has shed 15.5 percent, led by a drop of 26.1 percent in the tech sector.

The emerging primary listing trend would also be timely as mainland investors look for ways to diversify their portfolios, with the mainland authorities having tightened their grip on real estate and cryptocurrencies.

“These giants are widely known on the Chinese mainland, where most of their businesses are conducted. So it’s a good thing if they can allow investors there to share their growth through the cross-border investment channels,” says Ringo Choi, EY Asia-Pacific IPO leader.

The proven fundamentals of US-listed Chinese enterprises and new-economy businesses are also expected to boost Hong Kong’s fundraising activities, which have lost steam since the start of this year. Total funds raised through IPOs in Hong Kong plunged 91 percent to HK$19.7 billion ($2.51 billion) in the first half of 2022, compared with the same period last year, according to data from PwC.

Tianfeng Securities analyst Kong Rong says 64 US-listed Chinese companies, with a combined market capitalization of $179.1 billion, are now close to meeting the requirements for a dual primary listing in Hong Kong. She expects share sales from these companies to hit HK$210 billion at most in the coming years.

Applicable resorts

Edward Au, southern region managing partner at Deloitte China, says some US-listed Chinese firms may seek a primary or secondary listing in Hong Kong by way of introduction — a shortcut for a flotation with no funds raised — as a “transitional measure”. Shanghai-based electric-vehicle maker Nio and property agency KE Holdings are cases in point.

“Listing by introduction can impose less liquidity pressure on the market as there is no issuance of new shares,” explains Au. “Companies going public in this way will eventually issue shares in Hong Kong when the market situation somewhat improves.” 

But some 180 Chinese companies listed in the US face a difficult situation as they may not be able to apply for a primary or secondary listing in Hong Kong, given the city’s existing threshold for companies going public, including market value, revenue, net profit and operating cash flow, a Tianfeng Securities report said.

Such companies, including hardware manufacturer Canaan Creative and online used-car dealer Uxin, represent merely 11 percent of the total capitalization of US-traded Chinese enterprises. For small-cap companies in New York, the road ahead is either to go private if they have to delist, or look for an alternative venue to Hong Kong.

Privatization would be offered by controlling shareholders to buy back shares from smaller shareholders at a premium. Despite its high costs, most of these companies have relatively abundant reserves to do so as the ratio of their total cash to total market capitalization stands at 66 percent, with a median of about 47 percent, Kong says.

Choi from EY isn’t pessimistic either, as smaller companies do not necessarily have to list in places like Hong Kong, which pools money from international investors. “Just a few fund managers would be enough to top up their valuation if a listing elsewhere, say, the Chinese mainland’s A-share market, could be completed.”

Growing appeal

Meanwhile, there may be some good news on the horizon. Hong Kong Exchanges and Clearing, which runs the city’s bourse, may further ease its listing criteria to attract money-losing, high-technology firms — a proposal drawn from the experience of introducing Chapter 18A, which opened the bourse’s doors to pre-revenue biotech companies.

HKEX’s efforts have proved effective in the past few years in entrenching the SAR’s status as an offshore fundraising hub for Chinese companies. A very telling example is the wave of homecoming listings on the heels of the bourse’s listing rule changes in 2018 that allowed companies from “emerging and innovative sectors” to go public with weighted voting rights — a share structure widely adopted by new-economy mainland firms to raise capital without their founders losing control.

Since January, HKEX has made further amendments to enable mainland firms with weighted voting rights and variable interest entity structures to carry out dual primary listings in the city, paving the way for heavyweights like Alibaba to hedge against delisting risks and foster a wider investor base through upgrade listing plans.

“What the city’s stock exchange has been doing in recent years is to provide a variety of listing options based on the market’s specific needs,” says Au, adding that both Hong Kong and mainland firms have benefitted from the improved listing regime.

With the mainland companies’ vibrant relationship with the US drawing to a close, and links between Hong Kong and the mainland deepening, there are growing calls to forge a more comprehensive ecosystem to keep up with the financial center’s increasing appeal of a primary listing venue.

Au believes it’s the right time for Hong Kong to bolster the Stock Connect program with the mainland while promoting yuan-denominated stock trading to “mitigate foreign exchange risks”, saying, “This can attract more Chinese (mainland) companies to Hong Kong for primary or secondary listings and more investors to invest here.”

Choi suggests that the Hong Kong Stock Exchange should launch more “innovative regimes and products”; for instance, a separate “new tech board” on top of its main and Growth Enterprise Market boards.

The proposed new tech board, with certain exemptions and a specialized regulation committee, is expected to facilitate emerging tech companies that may not qualify to raise funds in Hong Kong at present, while safeguarding investors’ interests. This may also attract some mainland companies caught in the US delisting crunch.

“In addition to the official listing committee, the new tech board’s committee can bring in investors, scientists and reputable people with specialized knowledge to oversee its operations so that it can help make up for the lowering of the income threshold or profit requirement,” says Choi.

Wayne Yu, a professor at the City University of Hong Kong’s economics and finance department, says it’s important to strike a balance between investor protection and market development in the face of a potential mass delisting of Chinese companies in New York — firms that may then seek a primary share sale in the SAR.

Compared with the US market, share issuing companies or IPO candidates in Hong Kong are more regulated, but fewer disclosures are required. That makes it crucial for the city to introduce practices, such as class action — a legal proceeding originated in the US that can protect minority shareholders’ interests — Yu says.

“However, it’s not a task that Hong Kong’s stock exchange can accomplish on its own,” he says. “Other parties, such as our media, law firms and institutional investors, should all take up more responsibilities and move in sync with the healthy development of the market.”

Contact the writer at evanliu@chinadailyhk.com